Stimulation of the aryl hydrocarbon receptor (AHR) by xenobiotics is known to affect epidermal differentiation and skin barrier formation. The physiological role of endogenous AHR signaling in keratinocyte differentiation is not known. We used murine and human skin models to address the hypothesis that AHR activation is required for normal keratinocyte differentiation. Using transcriptome analysis of Ahr(-/-) and Ahr(+/+) murine keratinocytes, we found significant enrichment of differentially expressed genes linked to epidermal differentiation. Primary Ahr(-/-) keratinocytes showed a significant reduction in terminal differentiation gene and protein expression, similar to Ahr(+/+) keratinocytes treated with AHR antagonists GNF351 and CH223191, or the selective AHR modulator (SAhRM) SGA360. In vitro keratinocyte differentiation led to increased AHR levels and subsequent nuclear translocation, followed by induced CYP1A1 gene expression. Monolayer cultured primary human keratinocytes treated with AHR antagonists also showed an impaired terminal differentiation program. Inactivation of AHR activity during human skin equivalent development severely impaired epidermal stratification, terminal differentiation protein expression, and stratum corneum formation. As disturbed epidermal differentiation is a main feature of many skin diseases, pharmacological agents targeting AHR signaling or future identification of endogenous keratinocyte-derived AHR ligands should be considered as potential new drugs in dermatology.