pRB activates transcription by a poorly understood mechanism that involves relieving negative regulation of the promoter specificity factor Sp1. We show here that MDM2 inhibits Sp1-mediated transcription, that MDM2 binds directly to Sp1 in vitro as well as in vivo, and that MDM2 inhibits the DNA-binding activity of Sp1. Forced expression of pRB relieves MDM2-mediated repression, and interaction of pRB with the MDM2-Sp1 complex releases Sp1 and restores DNA binding. These results suggest a model in which the opposing activities of MDM2 and pRB regulate Sp1 DNA-binding and transcriptional activity.