The role of Notch signaling in growth/differentiation control of mammalian epithelial cells is still poorly defined. We show that keratinocyte-specific deletion of the Notch1 gene results in marked epidermal hyperplasia and deregulated expression of multiple differentiation markers. In differentiating primary keratinocytes in vitro endogenous Notch1 is required for induction of p21WAF1/Cip1 expression, and activated Notch1 causes growth suppression by inducing p21WAF1/Cip1 expression. Activated Notch1 also induces expression of 'early' differentiation markers, while suppressing the late markers. Induction of p21WAF1/Cip1 expression and early differentiation markers occur through two different mechanisms. The RBP-Jkappa protein binds directly to the endogenous p21 promoter and p21 expression is induced specifically by activated Notch1 through RBP-Jkappa-dependent transcription. Expression of early differentiation markers is RBP-Jkappa-independent and can be induced by both activated Notch1 and Notch2, as well as the highly conserved ankyrin repeat domain of the Notch1 cytoplasmic region. Thus, Notch signaling triggers two distinct pathways leading to keratinocyte growth arrest and differentiation.