The differentiation of murine erythroleukemia cells (T3C12 Friend cells) on treatment with dimethyl sulfoxide (DMSO) has been correlated with an early and extended overproduction of heme. The cessation of cell replication and the development of nuclear condensation, changes which are associated with the terminal differentiation of these cells, occur when the level of heme rises 0.1 nmol/10(6) cells over that amount which can be complexed by globin protein. A significant fraction of the excess heme is localized in the nuclei of the DMSO-treated cells. The addition of exogenous hemin facilitates the onset of terminal differentiation in the DMSO-treated T3C12 cells, whereas only the induction of globin gene expression is observed in the absence of DMSO. To study the role of heme in erythroid differentiation, a Friend cell variant (R10) has been isolated whose synthesis and accumulation of heme in response to DMSO is deficient. This variant grows logarithmically in the presence of DMSO and fails to terminally differentiate. When exogenous hemin is added, the DMSO-treated R10 cells stop replicating. In the absence of DMSO, however, hemin-treated R10 cells continue to grow and express their globin genes without exhibiting other signs of terminal differentiation. The combined results support the conclusion that both the DMSO treatment and the accumulation of excess heme are required to bring about the terminal differentiation of Friend erythroleukemia cells. Preliminary evidence is presented which suggests that in addition to the induction of heme and globin synthesis, DMSO also induces a heme activation process which is required for differentiation. The possible relationship of this process to the terminal differentiation of erythroid cells is discussed.