Cultured human epidermal cells were treated with 2,3,7,8-tetrachlorodibenzo-p-dioxin (TCDD) in the presence or absence of epidermal growth factor (EGF). In both normal keratinocytes and a spontaneously immortalized keratinocyte (SIK) line, TCDD treatment in the absence of EGF induced a marked reduction in colony size and cell number, and it perturbed colony morphology. These effects were largely prevented by EGF, indicating that growth factor action in the cellular microenvironment may considerably modify TCDD action in target cells. Both TCDD and EGF substantially reduced expression of the differentiation markers keratin 1 and keratin 10 in the normal and immortalized cells, and did so in an additive fashion. The cells did not display a general loss of differentiated function, since several other markers, including involucrin, were little affected. EGF dramatically stimulated telomerase activity in SIK cultures, and TCDD prevented this action but not by reducing cell growth. However, EGF did not stimulate telomerase activity in normal human epidermal cells despite an evident increase in their growth. The growth factor stimulation of telomerase in the minimally deviated SIK line suggests that derepression of enzyme activity in normal cells may occur in a stepwise fashion during neoplastic progression. TCDD could act as a late stage tumor promoter by selecting for variants in which telomerase is constitutively active.