Mouse F9 embryonic carcinoma (EC) cells differentiate in culture to parietal endoderm (PE) cells upon induction with retinoic acid and cyclic AMP. In the course of this process, the expression of polymerase III transcripts, e.g., 5S rRNA and U6 small nuclear RNA, is dramatically reduced. This reduction of endogenous RNA content is accompanied by a loss of transcriptional capacity in cell extracts from PE cells. Partial purification of such extracts reveals that the DNA-binding activity of transcription factor PBP, binding specifically to the proximal sequence element (PSE) sequence of vertebrate U6 genes, is significantly reduced. This finding is corroborated by a loss in the transcriptional activity of this factor in reconstitution assays with partially purified polymerase III transcription components. In contrast, the activity of TFIIIA and TFIIIB and the amount of free TATA-binding protein remain unchanged during the differentiation process analyzed here. These data show for the first time that the PSE-binding protein PBP is essentially involved in the differential regulation of polymerase III genes governed by external promoters.