The present study uses the B subunit of cholera toxin, a protein that binds specifically to ganglioside GM1, to examine the role of endogenous GM1 in the process of growth and differentiation of mouse neuroblastoma N18 cells. Binding of the B subunit to neuroblastoma N18 cells inhibited DNA synthesis with concomitant induction of differentiation. The B subunit induced pronounced morphological changes: an increase in neurite outgrowth with branched neurites and spinelike processes. The distinct morphological alterations and neuritogenesis in response to the B subunit were also revealed by immunofluorescence with fluorescein-labeled B subunit. The mechanism of the B subunit-induced differentiation is different than that of spontaneous differentiation. Thrombin, a serine protease present in normal serum, inhibits neurite outgrowth induced by the removal of serum from the medium. In contrast, thrombin did not cause retraction of the neurites induced by the B subunit. Thus, thrombin or a thrombin- like protease is not involved in the process of neurite outgrowth mediated through endogenous GM1. The biological effects of the B subunit are due to the binding of the B subunit to ganglioside GM1 and not due to changes in cAMP levels resulting from contaminating A subunit. We used highly purified cloned B subunit that cannot contain any A subunit because it was isolated from a Vibrio cholerae mutant that only expresses the B subunit. Neither the cloned nor commercial preparations of the B subunit induced increases of cAMP in these cells. There was a good correlation between the amount of B subunit bound to the cells and the biological effect. Finally, treatment with neuraminidase, which caused a fourfold increase in the level of membrane GM1 as determined by iodinated cholera toxin binding, enhanced the biological effect of the B subunit. However, neuraminidase treatment alone did not have significant effects, either on DNA synthesis or on morphology of the cells, indicating that elevations in the level of GM1 per se are not sufficient by themselves to cause significant changes in cell growth or differentiation. It seems most likely that the aggregation of endogenous GM1 on the cell surface by the B subunit is responsible for these effects on mouse neuroblastoma N18 cells.