Neurotransmitters are considered part of the signaling system active in nervous system development and we have previously reported that acetylcholine (ACh) is capable of enhancing neuronal differentiation in cultures of sensory neurons and N18TG2 neuroblastoma cells. To study the mechanism of ACh action, in this study, we demonstrate the ability of choline acetyltransferase-transfected N18TG2 clones (e.g. 2/4 clone) to release ACh. Analysis of muscarinic receptors showed the presence of M1-M4 subtypes and the activation of both IP(3) and cAMP signal transduction pathways. Muscarinic receptor activation increases early growth response factor-1 (EGR-1) levels and treatments with agonists, antagonists, and signal transduction enzyme inhibitors suggest a role for M3 subtype in EGR-1 induction. The role of EGR-1 in the enhancement of differentiation was investigated transfecting in N18TG2 cells a construct for EGR-1. EGR-1 clones show increased neurite extension and a decrease in Repressor Element-1 silencing transcription factor (REST) expression: both these features have also been observed for the 2/4 clone. Transfection of this latter with EGR zinc-finger domain, a dominant negative inhibitor of EGR-1 action, increases REST expression, and decreases fiber outgrowth. The data reported suggest that progression of the clone 2/4 in the developmental program is dependent on ACh release and the ensuing activation of muscarinic receptors, which in turn modulate the level of EGR-1 and REST transcription factors.