2,3,7,8-Tetrachlorodibenzo-p-dioxin (TCDD) modulates the proliferation, differentiation, or both, of epidermal keratinocytes in vivo and in culture. The growth of epidermal cells in culture is regulated by several biochemical mediators including epidermal growth factor (EGF). In this report the actions of TCDD on EGF binding in a basal cell population from a human keratinocyte cell line were examined. TCDD decreased the specific binding of 125I-EGF to basal cells by 40% within 96 hr. this reduction in EGF binding could not be attributed to changes in the state of differentiation as assessed by cell size and morphology, and cornified envelope competence, a marker of terminal differentiation. Modulation of EGF binding by TCDD was concentration-dependent (EC50 = 1 nm) and stereospecific, suggesting involvement of the Ah receptor. Scatchard analysis of EGF binding to the basal cells indicated a single class of high-affinity sites in both control (Kd = 0.14 nm) and treated (Kd = 0.11 nm) cultures and confirmed a decrease in the number of these sites in response to TCDD. The reduction in EGF binding correlated with a decrease in EGF-stimulated DNA synthesis and cell proliferation. Comparison of differentiation-competent squamous cell carcinoma (SCC) lines treated with TCDD supported an association between modulation of EGF binding and enhanced differentiation. The data indicate that basal cells are a target for TCDD. We propose that the modulation of EGF binding in basal keratinocytes by TCDD is one of the critical regulatory events resulting in enhanced differentiation.