During development, patterning and morphogenesis of tissues are intimately coordinated through control of cellular proliferation and differentiation. We describe a mechanism by which vertebrate Msx homeobox genes inhibit cellular differentiation by regulation of the cell cycle. We show that misexpression of Msx1 via retroviral gene transfer inhibits differentiation of multiple mesenchymal and epithelial progenitor cell types in culture. This activity of Msx1 is associated with its ability to upregulate cyclin D1 expression and Cdk4 activity, while Msx1 has minimal effects on cellular proliferation. Transgenic mice that express Msx1 under the control of the mouse mammary tumor virus long terminal repeat (MMTV LTR) display impaired differentiation of the mammary epithelium during pregnancy, which is accompanied by elevated levels of cyclin D1 expression. We propose that Msx1 gene expression maintains cyclin D1 expression and prevents exit from the cell cycle, thereby inhibiting terminal differentiation of progenitor cells. Our model provides a framework for reconciling the mutant phenotypes of Msx and other homeobox genes with their functions as regulators of cellular proliferation and differentiation during embryogenesis.