Normal myeloid and MGI(+)D(+) clones of myeloid leukemic cells can be induced for Fc and complement component 3 rosettes, lysozme, and mature macrophages and granulocytes by a protein with macrophage- and granulocyte-inducing (MGI) activity, whereas MGI(+)D(-) clones can be induced by this protein for rosettes and lysozme but not mature cells. Lipopolysaccharides (LPS) from different bacteria induced the appearance of rosettes, lysozyme, and macrophages in some MGI(+)D(+) clones but did not induce any of these changes in MGI(+)D(-) clones. Lipid A gave the same results as LPS. Incubation of MGI(+)D(+) cells with LPS also induced an MGI activity detectable in the culture medium. This activity behaved like MGI in inducing (i) rosettes, lysozyme, and mature cells in MGI(+)D(+) leukemic cells including a clone resistant to LPS, (ii) rosettes and lysozyme in MGI(+)D(-) leukemic cells, and (iii) differentiation of normal myeloid cells to mature macrophages and granulocytes. This activity was induced in MGI(+)D(+) cells by LPS before the induction of rosettes or lysozyme. The results indicate that the lipid A portion of LPS indirectly induces differentiation of MGI(+)D(+) myeloid leukemic cells by inducing MGI protein. It is suggested that induction of specific regulatory proteins may be a more general mechanism for the induction of differentiation by surface-acting compounds.