Proliferation and differentiation of muscle precursors are controlled by the activation of muscle-specific genes and inactivation of inhibitors of differentiation. Necdin is a multi-functional protein that is up-regulated during neural and myogenic differentiation. Necdin facilitates cell cycle exit and differentiation during development, but the role of necdin in embryonic myogenesis has not been described. In a cytoplasmic two-hybrid screen, we identified a novel interaction between necdin and the E1A-like inhibitor of differentiation (EID-1). EID-1 inhibits transcriptional activation of genes required for myogenic differentiation, and is degraded in myoblasts upon cell cycle exit. In a transactivation assay, necdin had no direct effect on myoD-responsive promoters in the presence of MyoD, but necdin did relieve the EID-1-dependent inhibition of these same promoters. In vivo, a normal number of MyoD-expressing myoblasts was present in primary embryonic limb bud cultures from mouse embryos with congenital necdin deficiency. In contrast, the number of myosin heavy chain-expressing myotubes in differentiating limb bud cultures cultured for 5 days was reduced compared with cultures from wild-type littermate controls. In the presence of necdin, steady-state levels of EID-1 were increased and the half-life of EID-1 was extended, and EID-1 was re-localized from the nucleus to the cytoplasm when necdin was co-expressed in transfected cells. Collectively, these data are consistent with a model whereby necdin promotes myoblast differentiation at least in part by relieving the inhibitory effect of EID-1.