The human BTG1 protein is thought to be a potential tumour suppressor because its overexpression inhibits NIH 3T3 cell proliferation. However, little is known about how BTG1 exerts its anti-proliferative activity. In this study, we used the yeast 'two-hybrid' system to screen for interacting protein partners and identified human carbon catabolite repressor protein (CCR4)-associative factor 1 (hCAF-1), a homologue of mouse CAF-1 (mCAF-1) and Saccharomyces cerevisiae yCAF-1/POP2. In vitro the hCAF-1/BTG1 complex formation was dependent on the phosphorylation of a putative p34cdc2 kinase site on BTG1 (Ser-159). In yeast, the Ala-159 mutant did not interact with hCAF-1. In addition, phosphorylation of Ser-159 in vitro showed specificity for the cell cycle kinases p34CDK2/cyclin E and p34CDK2/cyclin A, but not for p34CDK4/cyclin D1 or p34cdc2/cyclin B. Cell synchrony experiments with primary cultures of rat aortic smooth-muscle cells (RSMCs) demonstrated that message and protein levels of rat CAF-1 (rCAF-1) were up-regulated under conditions of cell contact, as previously reported for BTG1 [Wilcox, Scott, Subramanian, Ross, Adams-Burton, Stoltenborg and Corjay (1995) Circulation 92, I34-I35]. Western blot and immunohistochemical analysis showed that rCAF-1 localizes to the nucleus of contact-inhibited RSMCs, where it was physically associated with BTG1, as determined by co-immunoprecipitation with anti-hCAF-1 antisera. Overexpression of hCAF-1 in NIH 3T3 and osteosarcoma (U-2-OS) cells was itself anti-proliferative with colony formation reduced by 67% and 90% respectively. Taken together, these results indicate that formation of the hCAF-1/BTG1 complex is driven by phosphorylation at BTG1 (Ser-159) and implicates this complex in the signalling events of cell division that lead to changes in cellular proliferation associated with cell-cell contact.