The CDK inhibitor p21 (WAF-1/CIP-1/SDI-1) has been implicated in DNA damage-induced p53-mediated G1 arrest, as well as in physiological processes, such as cell differentiation and senescence, that do not involve p53 function. To determine the impact of p21 on normal development and cell-cycle regulation in vivo, we have generated transgenic mice that abundantly express p21 specifically in hepatocytes. During postnatal liver development, when transgenic p-21 protein becomes detectable, hepatocyte proliferation is inhibited dramatically. This disturbance causes a reduction in the overall number of adult hepatocytes, resulting in aberrant tissue organization, runted liver and body growth, and increased mortality. The transgenic p21 protein is associated with most, if not all, of the cyclin D1-CDK4 in liver but not significantly with other cyclin/CDK proteins, indicating the importance of cyclin D1-CDK4 function in normal liver development. The appearance of large polyploid nuclei in some hepatocytes indicates that p21 may also cause arrest during the G2 phase of the cell cycle. Significantly, partial hepatectomy failed to stimulate hepatocytes to proliferate in p21 transgenic animals. These results provide the first in vivo evidence that appropriate p21 levels are critical in normal development and further implicate p21 in the control of multiple cell-cycle phases.