Cell adhesion molecules are not only required for maintenance of tissue integrity, but also regulate many aspects of cell behaviour, including growth and differentiation. While the regulatory functions of integrin extracellular matrix receptors in keratinocytes are well established, such functions have not been investigated for the primary receptors that mediate keratinocyte intercellular adhesion, the cadherins. To examine cadherin function in normal human epidermal keratinocytes we used a retroviral vector to introduce a dominant negative E-cadherin mutant, consisting of the extracellular domain of H-2K^d and the transmembrane and cytoplasmic domains of E-cadherin. As a control a vector containing the same construct, but with the catenin binding site destroyed, was prepared. High levels of expression of the constructs were achieved; the dominant negative mutant, but not the control, formed complexes with α-, β- and γ-catenin. In cells expressing the dominant negative mutant there was a 5-fold decrease in the level of endogenous cadherins and a 3-fold increase in the level of β-catenin. Cell-cell adhesion and stratification were inhibited by the dominant negative mutant and desmosome formation was reduced. Expression of the mutant resulted in reduced levels of the α₂β₁ and α₃β₁ integrins and increased cell motility, providing further evidence for cross-talk between cadherins and the β₁ integrins. In view of the widely documented loss of E-cadherin in keratinocyte tumours it was surprising that the dominant negative mutant had an inhibitory effect on keratinocyte proliferation and stimulated terminal differentiation even under conditions in which intercellular adhesion was prevented. These results establish a role for cadherins in regulating keratinocyte growth and differentiation and raise interesting questions as to the relative importance of cell adhesion-dependent and-independent mechanisms.