In this report, we explored the mechanisms underlying keratinocyte-specific and differentiation-specific gene expression in the skin. We have identified five keratinocyte-specific, open chromatin regions that exist within the 6 kb of 5′ upstream regulatory sequence known to faithfully recapitulate the strong endogenous keratin 5 (K5) promoter and/or enhancer activity. One of these, DNase I-hypersensitive site (HSs) 4, was unique in that it acted independently to drive abundant and keratinocyte-specific reporter gene activity in culture and in transgenic mice, despite the fact that it was not essential for K5 enhancer activity. We have identified evolutionarily conserved regulatory elements and a number of their associated proteins that bind to this compact and complex enhancer element. The 125-bp 3′ half of this element (referred to as 4.2) is by far the smallest known strong enhancer element possessing keratinocyte-specific activity in vivo. Interestingly, its activity is restricted to a subset of progeny of K5-expressing cells located within the sebaceous gland. The other half of HSs 4 (termed 4.1) possesses activity to suppress sebocyte-specific expression and induce expression in the channel (inner root sheath) cells surrounding the hair shaft. Our findings lead us to a view of keratinocyte gene expression which is determined by multiple regulatory modules, many of which contain AP-2 and/or Sp1/Sp3 binding sites for enhancing expression in skin epithelium, but which also harbor one or more unique sites for the binding of factors which determine specificity. Through mixing and matching of these modules, additional levels of specificity are obtained, indicating that both transcriptional repressors and activators govern the specificity.