Cellular differentiation entails the coordination of cell cycle arrest and tissue-specific gene expression. We investigated the involvement of basic helix-loop-helix (bHLH) factors in differentiation of osteoblasts using the human osteoblastic cell line MG63. Serum starvation induced growth arrest at G1 phase, accompanied by expression of cyclin-dependent kinase inhibitor p21(WAF1/Cip1). Reporter assays with the p21 gene promoter demonstrated that the combination of E2A (E12 or E47) and coactivator CBP was responsible for p21 induction independent of p53. Twist inhibited E2A-CBP-dependent activation of the exogenous and endogenous p21 promoters. Ids similarly inhibited the exogenously transfected p21 promoter; however less antagonistic effect on the endogenous p21 promoter was observed. Twist was predominantly present in nuclei in MG63 cells growing in complete medium, while it localized mainly in the cytoplasm after serum starvation. The fibroblast growth factor receptor 3 gene (FGFR3), which generates signals leading to differentiation of osteoblasts, was found to be controlled by the same transcriptional regulation as the p21 gene. E2A and Twist influenced alkaline phosphatase expression, a consensus marker of osteoblast differentiation. Expression of E2A and FGFR3 was seen at the location of osteoblast differentiation in the calvaria of mouse embryos, implicating bHLH molecules in physiological osteoblast differentiation. These results demonstrate that a common regulatory system is involved in at least two distinct steps in osteoblastic differentiation. Our results also provide the molecular basis of Saethre-Chotzen syndrome, caused by mutations of the TWIST and FGFR3 genes.