NAT1/p97/DAP5 is a newly identified protein that shares homology with the translation initiation factor eIF4G. Studies in vitro and in transfected cells indicated that NAT1 might suppress global translation, thereby repressing cellular proliferation. Here we studied the functions of NAT1 in vivo by disrupting its gene in mice. NAT1(-/-) embryos died during gastrulation, indicating a crucial role for NAT1 in embryogenesis. Undifferentiated NAT1(-/-) embryonic stem cells were normal in morphology, proliferation, global translation and gene expression profile. However, NAT1(-/-) cells exhibited an impaired ability to differentiate: they were resistant to differentiation induced by retinoic acid, and teratomas derived from them consisted of undifferentiated and poorly differentiated tissues. The expression of retinoic acid-responsive genes, such as the cell-cycle inhibitor p21(WAF1), was selectively impaired in NAT1(-/-) cells. Transcription from synthetic retinoic acid-responsive elements was also impaired. These data demonstrated that this translation initiation factor homolog controls specific gene expression pathways required for cellular differentiation.