TSG101 was discovered in a screen for tumor susceptibility genes and has since been shown to have a multiplicity of biological effects. However, the basis for TSG101's ability to regulate cell growth has not been elucidated. We report here that the TSG101 protein binds to the cyclin/cyclin-dependent kinase (CDK) inhibitor (CKI) p21(Cip1/WAF1) and increases stability of the p21 protein in HEK293F cells and differentiating primary keratinocytes, suppressing differentiation in a p21-dependent manner. In proliferating keratinocytes where the p21 protein is relatively stable, TSG101 does not affect the stability or expression of p21 but shows p21-dependent recruitment to cyclin/CDK complexes, inhibits cyclin/CDK activity, and causes strong growth suppression to a much greater extent in p21+/+ than in p21-/- cells. Conversely, suppression of endogenous TSG101 expression by an antisense TSG101 cDNA causes doubling of the fraction of keratinocytes in the S phase of the cell cycle as occurs during p21 deficiency. Our results indicate that TSG101 has a direct role in the control of growth and differentiation in primary epithelial cells, and that p21 is an important mediator of these TSG101 functions.