The basic helix-loop-helix transcription factor TAL1 (or SCL) is a critical regulator of hematopoietic and vascular development and is misexpressed in the majority of patients with T-cell acute lymphoblastic leukemia. We found previously that TAL1 could interact with transcriptional co-activator and co-repressor complexes possessing histone acetyltransferase and deacetylase activities, respectively. Here, we report that TAL1 is subject to acetylation in vivo and can be acetylated by p300 and the p300/CBP-associated factor P/CAF in vitro. P/CAF-mediated acetylation, which mapped to a lysine-rich motif in the loop region, increased TAL1 binding to DNA while selectively inhibiting its interaction with the transcriptional co-repressor mSin3A. Furthermore, P/CAF protein, TAL1-P/CAF interaction and TAL1 acetylation increased significantly in murine erythroleukemia cells induced to differentiate in culture, while enforced expression of an acetylation-defective P/CAF mutant inhibited endogenous TAL1 acetylation, TAL1 DNA-binding activity, TAL1-directed transcription and terminal differentiation of these cells. These results reveal a novel mechanism by which TAL1 activity is regulated and implicate acetylation of this transcription factor in promotion of erythroid differentiation.