Mammalian p300 and CBP are related transcriptional cofactors that possess histone acetyltransferase activity. Inactivation of CBP/p300 is critical for adenovirus E1A to induce oncogenic transformation and to inhibit differentiation, suggesting that these proteins are likely to play a role in cell growth and differentiation. Here we show that a Caenorhabditis elegans gene closely related to CBP/p300, referred to as cbp-1, is required during early embryogenesis to specify several major differentiation pathways. Inhibition of cbp-1 expression causes developmental arrest of C. elegans embryos with no evidence of body morphogenesis but with nearly twice the normal complement of embryonic cells. Mesodermal, endodermal, and hypodermal cells appear to be completely absent in most embryos, however, all of the embryos exhibit evidence of neuronal differentiation. Our analysis of this phenotype suggests a critical role for CBP-1 in promoting all non-neuronal pathways of somatic differentiation in the C. elegans embryo. In contrast, we show that C. elegans genes related to components of a conserved mammalian histone deacetylase, appear to have a role in repressing somatic differentiation. Our findings suggest a model in which CBP-1 may activate transcription and differentiation in C. elegans by directly or indirectly antagonizing a repressive effect of histone deacetylase.