Collagenase-3 (MMP-13) is characterized by an exceptionally wide substrate speci®city and restricted expression. MMP-13 is speci®cally expressed by transformed human keratinocytes in squamous cell carcinomas in vivo and its expression correlates with their invasion capacity. Here, we show, that interferon-g (IFN-g) markedly inhibits expression of MMP-13 by human cutaneous SCC cells (UT-SCC-7) and by ras-transformed human epidermal keratinocytes (A-5 cells) at the transcriptional level. In addition, IFN-g inhibits collagenase-1 (MMP-1) expression in these cells. IFN-g abolished the enhancement of MMP-13 and MMP-1 expression by transforming growth factor-b (TGF-b) and tumor necrosis factor-a (TNF-a), and inhibited invasion of A-5 cells through type I collagen. IFN-g also rapidly and transiently activates extracellular signal-regulated kinase 1,2 (ERK1,2) and blocking ERK1,2 pathway (Raf/MEK1,2/ERK1,2) by speci®c MEK1,2 inhibitor PD98059 partially (by 50%) prevents Ser-727 phosphorylation of STAT1 and suppression of MMP-13 expression by IFN-g. Furthermore, Ser-727 phosphorylation of STAT1 by ERK1,2, or independently of ERK1,2 activation is associated with marked reduction in MMP-13 expression. These observations identify a novel role for IFN-g as a potent inhibitor of collagenolytic activity and invasion of transformed squamous epithelial cells, and show that inhibition of MMP-13 expression by IFN-g involves activation of ERK1,2 and STAT1. Oncogene (2000) 19, 248 ± 257.