The beta-catenin TCF pathway is implicated in the regulation of colonic epithelial cell proliferation, but its role in the regulation of cell differentiation is unknown. The colon carcinoma cell line, Caco-2, spontaneously undergoes G(0)/G(1) cell cycle arrest and differentiates along the absorptive cell lineage over 21 days in culture. In parallel, we show that beta-catenin-TCF activity and complex formation are significantly down-regulated. The down-regulation of beta-catenin-TCF signaling was independent of APC, which we characterized as having a nonsense mutation in codon 1367 in Caco-2 cells, but was associated with a decrease in TCF-4 protein levels. Total beta-catenin levels increased during Caco-2 cell differentiation, although this was attributable to an increase in the membrane, E-cadherin-associated, fraction of beta-catenin. Importantly, down-regulation of beta-catenin-TCF signaling in undifferentiated Caco-2 cells by three different mechanisms, ectopic expression of E-cadherin, wild-type APC, or dominant negative TCF-4, resulted in an increase in the promoter activities of two genes that are well-established markers of cell differentiation, alkaline phosphatase and intestinal fatty acid binding protein. These studies demonstrate, therefore, that in addition to its established role in the regulation of cell proliferation, down-regulation of the beta-catenin-TCF pathway is associated with the promotion of a more-differentiated phenotype in colonic epithelial cells.