The human erythroleukemic cell line K562 was used as a model for analysis of the mechanisms responsible for alterations in gene expression during differentiation. K562 cells normally synthesize fetal hemoglobin (gamma-globin), but treatment with tumor-promoting phorbol esters (phorbol myristate acetate and tetradecanoyl phorbol acetate) results in the loss of the erythroid phenotype of the cells and causes a shift toward a megakaryocytic phenotype. This shift involves markedly decreased production of fetal hemoglobin and de novo synthesis of a number of proteins specific for megakaryocytes. The results of this work indicate that negative regulation of fetal hemoglobin during megakaryocytic differentiation of K562 cells occurs at the level of down regulation of gamma-globin mRNA accumulation. This effect consists of at least two components: reduction in the rate of transcription of the gamma-globin gene and decrease in stability of the normally very stable gamma-globin mRNA. We have developed two assay systems that permit investigation of the transcriptional and posttranscriptional effects of phorbol myristate acetate independently from each other. These assay systems make use of a heterologous reporter gene for the transcriptional analysis and a marked gamma-globin gene for the analysis of mRNA stability. The DNA sequences located in the 3' flanking region of the A gamma-globin gene were found to be responsible for the decrease in transcription rate.