A fungus-derived compound (OSI-2040) which induces fetal globin expression in the absence of erythroid cell differentiation was identified in a high-throughput drug discovery program. We utilized this compound to isolate γ-globin regulatory genes that are differentially expressed in OSI- 2040-induced and uninduced cells in the human erythroleukemia cell line K562. Representation difference analysis (RDA) of cDNA revealed several genes that were significantly up- or down-regulated in OSI-2040-induced cells. One gene whose expression was markedly enhanced was the gene for the helix-loop-helix (LHL) transcription factor Id2. Southern analysis of RDA amplicons demonstrated progressive enrichment of Id2 with each successive subtraction of uninduced cDNA from induced cDNA. Northern analysis of OSI-2040-induced K562 cells confirmed that Id2 expression was directly up-regulated coordinately with γ-globin. Analysis of other inducers of fetal globin demonstrated up-regulation of Id2 with sodium butyrate but not with hemin. Retrovirus-mediated overexpression of Id2 in K562 cells reproduced the enhancement of endogenous globin expression observed with OSI-2040 induction. Functional assays demonstrated that an E-box element in hypersensitivity site 2 is required for Id2-dependent enhancement of γ-promoter activity. Protein binding studies suggest that alterations in E-box site occupancy by basic HLH proteins may influence this activity, thus expanding the potential role of these factors in globin gene regulation.