Keratinocytes are functionally divided into stem cells, transit amplifying cells and terminally differentiated cells. In a hyperproliferative skin disease, psoriasis, increased mitotic activity of the stem cells is chiefly responsible for epidermal hyperplasia. The effects of 1,25dihydroxyvitamin D3 (1,25(OH)2D3) and potent vitamin D3 analogues (MC 1288: 20‐epi‐1,25(OH)2D3, MC 1301: 20‐epi‐24a‐homo‐26,27‐dimethyl‐1,25(OH)2D3, KH 1060: 20‐epi‐22‐oxa‐24a‐homo‐26,27‐dimethyl‐1,25(OH)2D3) on the stem cells were investigated.Stem cells were identified retrospectively as those giving rise to large keratinocyte colonies in culture (holoclones). 1,25(OH)2D3 (10−8–10−6m) suppressed formation of holoclones by stimulating the progenitor cell differentiation into the phenotype expressing differentiation markers (keratins K1/K10 and involucrin).20‐Epi vitamin D3 analogues were more potent than 1,25(OH)2D3 in inhibiting the clonal keratinocyte growth. This activity correlated with the ability to induce cell differentiation (KH 1060>MC 1301>MC 1288>1,25(OH)2D3).Cytokines modulated the effects of 1,25(OH)2D3 on clonal growth. One of the following cytokines (epidermal growth factor, transforming growth factor α, interleukin‐1α, interleukin‐1β, interleukin‐6, interleukin‐8) was required for 1,25(OH)2D3 to suppress clonal growth and induce cell differentiation. In contrast, keratinocyte growth factor and insulin‐like growth factor I attenuated the effects of 1,25(OH)2D3.In conclusion, 1,25(OH)2D3 and 20‐epi vitamin D3 analogues suppress clonal growth by directly inducing the differentiation of progenitor cells. It is conceivable that stimulation of stem cells differentiation is a major mechanism of action of vitamin D3 compounds in psoriasis. Balance between different types of cytokines in psoriatic epidermis may be an important factor determining the clinical effect of vitamin D‐based therapy.British Journal of Pharmacology (1997) 120, 1119–1127; doi:10.1038/sj.bjp.0701015