During development, multipotent progenitor cells establish lineage-specific programmers of gene activation and silencing underlying their differentiation into specialized cell types. We show that the Polycomb component Cbx4 serves as a critical determinant that maintains the epithelial identity in the developing epidermis by repressing nonepidermal gene expression programs. Cbx4 ablation in mice results in a marked decrease of the epidermal thickness and keratinocyte (KC) proliferation associated with activation of numerous neuronal genes and genes encoding cyclin-dependent kinase inhibitors (p16/p19 and p57). Furthermore, the chromodomain- and SUMO E3 ligase–dependent Cbx4 activities differentially regulate proliferation, differentiation, and expression of nonepidermal genes in KCs. Finally, Cbx4 expression in KCs is directly regulated by p63 transcription factor, whereas Cbx4 overexpression is capable of partially rescuing the effects of p63 ablation on epidermal development. These data demonstrate that Cbx4 plays a crucial role in the p63-regulated program of epidermal differentiation, maintaining the epithelial identity and proliferative activity in KCs via repression of the selected nonepidermal lineage and cell cycle inhibitor genes.