Interferon-gamma is a potent inducer of growth arrest and squamous differentiation of human epidermal keratinocytes in vitro. In order to understand the proximate events regulating interferon-gamma action we studied the relationship between interferon-gamma-mediated induction of a cytoplasmic guanylate-binding protein and the expression of growth and differentiation marker genes in normal and transformed keratinocytes. Induction of guanylate-binding protein mRNA by interferon-gamma was detectable at 4 h, was transcription dependent, and preceded changes in the expression of markers of growth arrest (E2F-1 mRNA downregulation) and differentiation (SQ37 mRNA induction). The Ec50 value for guanylate-binding protein induction (4 units interferon-gamma per ml) was lower than previously reported for SQ37 (40 units interferon-gamma per ml). Guanylate-binding protein mRNA appeared to be only moderately downregulated by modulators of the squamous phenotype such as retinoic acid and transforming growth factor-beta1. In addition, mRNA levels of E2F-1 or SQ37 were not altered in several squamous carcinoma cell lines treated with interferon-gamma. In contrast, guanylate-binding protein mRNA was highly induced in all these cell lines following interferon-gamma treatment. Further analysis of the signal transduction pathway mediating interferon-gamma responses using protein kinase inhibitors indicated that guanylate-binding protein induction in normal human epidermal keratinocyte cells was most likely protein kinase C independent. Our data suggest that more than one postreceptor interferon-gamma signaling pathway exists in keratinocytes and that at least one of these pathways is defective in squamous carcinoma cells. Furthermore, our data demonstrated that the failure of the squamous carcinoma cells to undergo interferon-gamma-induced growth arrest and differentiation is not due to an inherent defect in interferon-gamma receptor activation, but most likely is due to a defect in a non-guanylate-binding protein-dependent signaling pathway.