Embryonic cells are expected to possess high growth/differentiation potential, required for organ morphogenesis and expansion during development. However, little is known about the intrinsic properties of embryonic epithelial cells due to difficulties in their isolation and cultivation. We report here that pure keratinocyte populations from E15.5 mouse embryos commit irreversibly to differentiation much earlier than newborn cells. Notch signaling, which promotes keratinocyte differentiation, is upregulated in embryonic keratinocyte and epidermis, and elevated caspase 3 expression, which we identify as a transcriptional Notch1 target, accounts in part for the high commitment of embryonic keratinocytes to terminal differentiation. In vivo, lack of caspase 3 results in increased proliferation and decreased differentiation of interfollicular embryonic keratinocytes, together with decreased activation of PKC-δ, a caspase 3 substrate which functions as a positive regulator of keratinocyte differentiation. Thus, a Notch1-caspase 3 regulatory mechanism underlies the intrinsically high commitment of embryonic keratinocytes to terminal differentiation.