The MHC class I murine and beta-2-microglobulin genes are silent in embryonal carcinoma (EC) cells but are induced upon differentiation of these cells. We have previously shown that enhancer-like sequences located in the promoter of the H-2Kb gene are non-functional in F9 and PCC3 cells. We have previously purified a 48 kd protein (KBF1) from a mouse T cell line which binds to a palindromic sequence located in this enhancer and to a similar sequence in the promoter of the beta-2-microglobulin gene. We describe here the purification of a second protein (KBF2, 58 kd) which also binds to this sequence. While both activities are present in differentiated cells, KBF1 binding activity is absent in undifferentiated EC cells, where the palindromic sequence shows no enhancer activity. Upon differentiation, KBF1 binding activity is induced and the palindromic sequence becomes active as an enhancer. Thus, the absence of KBF1 activity in undifferentiated EC cells is at least in part responsible for the lack of expression of H-2 class I and beta-2-microglobulin genes in these cells and suggests that KBF1 activity is regulated during differentiation.