Rabbit tracheal epithelial cells undergo terminal cell division, start to express a squamous phenotype, and form cross-linked envelopes when reaching the plateau phase of the growth curve. This terminal differentiation is accompanied by a 20-30-fold increase in the activity of the cross-linking enzyme transglutaminase. This activity is found almost solely in the particulate fraction of homogenized cells and can be solubilized by nonionic detergents. This transglutaminase crossreacts with a monoclonal antibody raised against type I transglutaminase, but does not react with an antiserum against type II transglutaminase. The tracheal transglutaminase contains a protein subunit of approximately 92 kDa. The omission of epidermal growth factor from the medium or the addition of fetal bovine serum, conditions that induce terminal cell division and expression of a squamous phenotype, enhance transglutaminase activity. High calcium concentrations only stimulate transglutaminase activity after the cells become committed to terminal cell division. Retinoids, which inhibit the expression of the squamous phenotype but not terminal cell division, inhibit the enhancement in transglutaminase activity induced by either confluency or serum, indicating that this enzyme activity is under the control of retinoids. Some retinoids are active at concentrations as low as 10(-12) M. The ability of retinoids to inhibit transglutaminase activity correlates well with their capacity to bind to the retinoic acid-binding protein. Our results show that the increase in transglutaminase activity correlates with the induction of the terminal differentiated phenotype and suggest that this enzyme can function as a marker for this program of differentiation of rabbit tracheal epithelial cells in culture. Our results identify the transglutaminase as type I transglutaminase and are in agreement with the concept that this transglutaminase is involved in the formation of cross-linked envelopes.