Analysis of the differentiation in culture of murine embryonic stem (ES) cells has resulted in the identification and characterization of the regulatory factor differentiation inhibiting activity (DIA). DIA specifically suppresses differentiation of the pluripotential ES cells without compromise of their developmental potential. DIA is identical to the pleiotropic cytokine leukaemia inhibitory factor (LIF) which has a broad range of biological activities in vitro and in vivo. It is produced in both diffusible and matrix-localised forms whose expression is differentially regulated. The compartmentalization of DIA/LIF and the modulation of its expression during stem cell differentiation and by other cytokines may be significant elements in the control of early embryo development. These features may also indicate general principles of the regulatory networks which govern stem cell renewal and differentiation in later development.