Vulval differentiation in Caenorhabditis elegans involves several fundamental cellular events, including cell fusion, division and migration. We have characterized the role of the lin-40 (also known as egr-1) gene in these cellular processes. LIN-40 is homologous to the metastasis-associated factor 1 (MTA1) in mammals, which has been identified as a component of the nucleosome remodeling and histone deacetylation (NuRD) complex that functions as a transcriptional co-repressor. We show here that lin-40 negatively regulates vulval fate specification at least partly by promoting cell fusion between the vulval precursor cells and the hypodermal syncytium at an early larval stage. This inhibitory function of lin-40 might be carried out by downregulating lin-39 Hox expression. We also show that lin-40 is specifically required for cell divisions along the transverse orientation during vulval morphogenesis.