The cytoplasmic regions of the receptors for epidermal growth factor (EGF) and platelet-derived growth factor (PDGF) bind and activate phospholipase C-gamma1 (PLC-gamma1) and other signaling proteins in response to ligand binding outside the cell. Receptor binding by PLC-gamma1 is a function of its SH2 domains and is required for growth factor-induced cell cycle progression into the S phase. Microinjection into MDCK epithelial cells and NIH 3T3 fibroblasts of a polypeptide corresponding to the noncatalytic SH2-SH2-SH3 domains of PLC-gamma1 (PLC-gamma1 SH2-SH2-SH3) blocked growth factor-induced S-phase entry. Treatment of cells with diacylglycerol (DAG) or DAG and microinjected inositol-1,4,5-triphosphate (IP3), the products of activated PLC-gamma1, did not stimulate cellular DNA synthesis by themselves but did suppress the inhibitory effects of the PLC-gamma1 SH2-SH2-SH3 polypeptide but not the cell cycle block imposed by inhibition of the adapter protein Grb2 or p21 Ras. Two c-fos serum response element (SRE)-chloramphenicol acetyltransferase (CAT) reporter plasmids, a wild-type version, wtSRE-CAT, and a mutant, pm18, were used to investigate the function of PLC-gamma1 in EGF- and PDGF-induced mitogenesis. wtSRE-CAT responds to both protein kinase C (PKC)-dependent and -independent signals, while the mutant, pm18, responds only to PKC-independent signals. Microinjection of the dominant-negative PLC-gamma1 SH2-SH2-SH3 polypeptide greatly reduced the responses of wtSRE-CAT to EGF stimulation in MDCK cells and to PDGF stimulation in NIH 3T3 cells but had no effect on the responses of mutant pm18. These results indicate that in addition to Grb2-mediated activation of Ras, PLC-gamma1-mediated DAG production is required for EGF- and PDGF-induced S-phase entry and gene expression, possibly through activation of PKC.