Schwann cells synthesize two heparan sulfate proteoglycans, one that is a component of the Schwann cell basement membrane and a smaller one that is an integral component of the Schwann cell plasma membrane. To determine the functions of these molecules, Schwann cell-nerve cell cultures were grown in medium containing a specific inhibitor of proteoglycan biosynthesis, 4-methylumbelliferyl-beta-D-xyloside. Treatment with 1 mM beta-D-xyloside caused a 90% reduction in the accumulation of 35SO4-labeled proteoglycans in the cell layer of the cultures. Gel filtration analysis revealed that both the basement membrane and plasma membrane proteoglycans were affected. Inhibition of proteoglycan biosynthesis was accompanied by an inhibition of laminin deposition into extracellular matrix as determined by immunostaining of cultures and by immunoblotting of cell-associated proteins. This occurred even though there was no decrease in the amount of laminin detected in the medium of beta-D-xyloside-treated cultures. Deposition of collagen type IV was similarly affected. In addition, there was no myelin produced in beta-D-xyloside treated cultures. However, when beta-xyloside-treated cultures were supplied with exogenous basement membrane, Schwann cells produced numerous myelin segments. These results indicate that Schwann cell proteoglycans play an essential role in basement membrane assembly, and that the integral plasma membrane proteoglycan is not required for the basement membrane to exert its effects on Schwann cell differentiation.