Mechanisms regulating Schwann cell differentiation into a myelinating or a mature nonmyelinating phenotype during development are poorly understood. Humoral factors such as members of the transforming growth factor-beta (TGF-beta) family, which are found in the developing and adult mammalian nervous system and are known to affect cell differentiation, could be involved. We tested the effects of TGF-beta isoforms on the ensheathment and myelination of dorsal root ganglion (DRG) neurons by Schwann cells in vitro. Rat embryonic DRG neurons and Schwann cells from the sciatic nerve were isolated, purified, and recombined. In serum-free conditions, TGF-beta blocked both Schwann cell myelination and the expression of the myelin-related molecules galactocerebroside, P0, myelin-associated glycoprotein, and myelin basic protein. In contrast, the expression of molecules characteristic of mature nonmyelinating Schwann cells, including neural-cell adhesion molecule, L1, and nerve growth factor receptor, was maintained when compared to Schwann cells in nondifferentiated cultures. Notably, the expression of glial fibrillary acidic protein, which is expressed only in mature nonmyelinating Schwann cells in vivo, was increased 10-fold in our cultures by TGF-beta. Electron microscopic analysis indicated that in the presence of TGF-beta, basal lamina deposition by Schwann cells was slightly increased. Most importantly, many axons in TGF-beta- treated cultures received ensheathment typical of mature nonmyelinated nerves. These effects of TGF-beta were partially reversed by specific neutralizing anti-TGF-beta antibodies. We interpret these results as evidence that TGF-beta regulates Schwann cell differentiation in vitro by blocking the expression of the myelinating phenotype and promoting the development of the nonmyelinating phenotype.