Following a phase of rapid proliferation, cells in developing embryos must decide when to cease division and then whether to survive and differentiate or instead undergo programmed death. In screens for genes that regulate embryonic patterning of the endoderm in Caenorhabditis elegans, we identified overlapping chromosomal deletions that define a gene required for these decisions. These deletions result in embryonic hyperplasia in multiple somatic tissues, excessive numbers of cell corpses, and profound defects in morphogenesis and differentiation. However, cell-cycle arrest of the germline is unaffected. Cell lineage analysis of these mutants revealed that cells that normally stop dividing earlier than their close relatives instead undergo an extra round of division. These deletions define a genomic region that includes cki-1 and cki-2, adjacent genes encoding members of the Cip/Kip family of cyclin-dependent kinase inhibitors. cki-1 alone can rescue the cell proliferation, programmed cell death, and differentiation and morphogenesis defects observed in these mutants. In contrast, cki-2 is not capable of significantly rescuing these phenotypes. RNA interference of cki-1 leads to embryonic lethality with phenotypes similar to, or more severe than, the deletion mutants. cki-1 and -2 gene reporters show distinct expression patterns; while both are expressed at around the time that embryonic cells exit the cell cycle, cki-2 also shows marked expression starting early in embryogenesis, when rapid cell division occurs. Our findings demonstrate that cki-1 activity plays an essential role in embryonic cell cycle arrest, differentiation and morphogenesis, and suggest that it may be required to suppress programmed cell death or engulfment of cell corpses.