PA-1 human teratocarcinoma cells differentiate in response to retinoic acid in monolayer culture forming multiple cell types and thus represent a good model for molecular mechanisms of embryonic development and differentiation. Variant cell lines have b een engineered with a point-mutated N-ras oncogene that are unable to differentiate in retinoic acid due to this constitutive proliferative signal. A mechanism that accounts for some or all of the resistance is overexpression of the transcription factor AP-2. The teratocarcinoma cells transformed by an activated N-ras oncogene are retinoid resistant. AP-2 is retinoid inducible in responsive teratocarcinoma cells. However, in retinoid resistant ras transformed cells, AP-2 mRNA is overexpressed. Althou gh ras-transformed cells overexpress AP-2 mRNA, they have lost all endogenous transcription activity measured from a reporter plasmid with 3 AP-2 DNA binding sites adjacent to a basal level promoter. Antisense inhibition of ras results in restoration of normal AP-2 activity indicating that overexpression of AP-2 is an epigenetic effect dependent on the activated N-ras oncogene. These data also show that AP-2 is part of the signal transduction pathway that is mediated by ras. If AP-2 is constitutively overexpressed from an SV40 promoter, AP-2 activity is similarly inhibited, and the resulting cells have low AP-2 transcriptional activity. Cell lines stably expressing AP-2 or only its activation domain are transformed and differentiation resistant. This indicates that much of the activity of a ras oncogene is mediated by overexpression of the transcription factor AP-2. The mechanism of transcriptional inhibition is general for certain transcription factors. Others within this class of transcription fa ctors can cross inhibit transcription. This sort of pleotropic effect on transcription has never been shown before and may account for how oncogenic transcription factors transform cells and block differentiation.