p63/p51, a homolog of the tumor suppressor protein p53, is chiefly expressed in epithelial tissues, including the epidermis. p63 affects cell death similar to p53, and also plays important roles in the development of epithelial tissues and the maintenance of epithelial stem cells. Because it remains unclear how p63 regulates epithelial cell differentiation, we examined the function(s) of p63 in keratinocyte differentiation through the use of a keratinocyte culture system. DeltaNp63alpha (DeltaNp51B), a p63 isoform specifically expressed in basal keratinocytes, suppressed the differentiation of specific late-stage proteins, such as filaggrin and loricrin. In contrast, DeltaNp63alpha induced keratin 1 (K1), which is expressed at the start of differentiation, via c-Jun N-terminal kinase (JNK)/AP-1 activation. However, p63 did not induce K1 expression in the basal layer in vivo, although basal keratinocytes had high levels of p63. This discrepancy was explained by the suppression of K1 expression by dermis-secreted keratinocyte growth factor. This suppression occurred via extracellular signal-related kinase (ERK) signaling, and counteracted the p63-mediated induction of K1. Thus, a precise balance between p63 and keratinocyte growth factor mediates the onset of epithelial cell differentiation, through JNK and ERK signaling. These data may provide mechanistic explanations for the pathological features of skin diseases, including psoriasis.