When cultured in 20% O(2), human cytotrophoblasts fuse to form the syncytiotrophoblast with marked induction of hCYP19 (aromatase) gene expression. When cultured in 2% O(2), cytotrophoblast fusion and induced hCYP19 expression are prevented. These effects of hypoxia are mediated by increased expression of mammalian achaete/scute homologue-2 (Mash-2), which increases levels of upstream stimulatory factors 1 and 2 (USF1/2) and their binding as heterodimers to E-boxes surrounding the hCYP19 promoter. In studies to define mechanisms for O(2) regulation of syncytiotrophoblast differentiation, we found that hypoxia and overexpression of Mash-2 markedly increased cyclin B1 levels in cultured trophoblasts and the proportion of cells at the G(2)/M transition. Unlike USF proteins, USF1/2 mRNA levels are unaffected by O(2) tension. To determine whether increased O(2) might enhance proteasomal degradation of USF1/2, human trophoblasts were cultured in 2% or 20% O(2) with or without proteasome inhibitors. In cells cultured in 20% O(2), proteasome inhibitors increased USF1/2 protein levels and blocked spontaneous induction of hCYP19 expression, cell fusion, and differentiation. Like hypoxia, inhibitory effects of proteasome inhibitors on hCYP19 expression were mediated by increased binding of USF1/2 to the E-boxes. In human trophoblast cells cultured in 20% O(2), increased polyubiquitylation of USF1/2 proteins was observed. Thus, early in gestation when the placenta is relatively hypoxic, increased USF1/2 may block trophoblast differentiation and hCYP19 gene expression. In the second trimester, increased O(2) tension promotes proteasomal degradation of USF1/2, resulting in syncytiotrophoblast differentiation and induction of hCYP19 expression.