Insulin-like growth factor binding proteins (IGFBPs) comprise a family of secreted proteins that bind insulin-like growth factors-I and -II (IGF-I and -II) with high affinity and potentially modulate their biological effects. We have demonstrated previously that IGFBP-5, the most conserved of the six known IGFBPs, is expressed in muscle cells in the developing embryo and during the terminal differentiation of several myogenic cell lines. In this study we show that an IGF-I analog that binds minimally to IGFBPs potently enhances the differentiation of the stringently controlled inducible C2 myoblast (C2l) cell line and identify IGFBP-5 as the sole IGFBP secreted during C2l differentiation. We find that induction of IGFBP-5 mRNA and protein is coincident with the onset of myogenin gene expression and occurs secondary to the rapid activation of IGFBP-5 gene transcription. By transient gene transfer experiments we demonstrate that a 1004 base pair segment of the IGFBP-5 promoter is very active in directing expression of the reporter gene luciferase in C2l myoblasts. A promoter fragment containing only 156 nucleotides of 5'-flanking DNA retained more than 70% of maximal activity and mediated at least part of the differentiation-dependent rise in IGFBP-5 gene transcription. Within this active segment are several potential binding sites for muscle-enriched transcription factors. Our results show that induction of IGFBP-5 expression is an early event in the myogenic differentiation of the C2l cell line and suggest that one function of this IGFBP is to modulate IGF-induced differentiation. C2l cells are thus an excellent in vitro model for elucidating the developmental factors that control IGFBP-5 gene transcription and action in skeletal muscle.