The cyclin-dependent kinase inhibitor p21 is induced in several in vitro terminal differentiation systems as well as in differentiating tissues in vivo. To determine the mechanism responsible for p21 induction during differentiation of mouse primary keratinocytes, we performed a deletion analysis of the p21 promoter. The minimal region of the p21 promoter required for its induction in keratinocyte differentiation consists of a contiguous stretch of 78 base pairs, which contains a GC-rich region as well as the TATA box. We determined that transcription factors Sp1 and Sp3, present in primary keratinocyte nuclear extracts, bind the GC region concomitantly. Expression studies established that both Sp1 and Sp3 activate the p21 promoter, but showed that only Sp3 overexpression enhances promoter inducibility during differentiation. Furthermore, disruption of the GC-rich region dramatically decreases transcription factor binding as well as promoter activity and inducibility upon differentiation. The overexpression of either Sp1 or Sp3 restores the basal activity of the disrupted promoter, but only Sp3 can restore its inducibility. These findings show that both Sp1 and Sp3 can contribute to the basal activity of the p21 promoter, and establish Sp3 as a specific transcription factor involved in the induction of p21 promoter during keratinocyte differentiation.