The formation of covalent isopeptide cross-links between cell surface protein molecules by the enzyme transglutaminase C influences cell adhesion and morphology. Retinoid-inducible cross-linking activity associated with this enzyme is present in the developing rat cerebellar cortex [Perry M. J. M. et al. (1995) Neuroscience 65, 1063-1076]. A monoclonal antibody was used to localize transglutaminase C to granule neurons in the developing cerebellar cortex. The enzyme was inducible by retinoic acid both in granule neurons cultured from postnatal rat cerebellar cortex and in cells of the embryonic dorsal rhombic lip, which contain granule neuron precursors. A possible biological function for transglutaminase activity was investigated in living granule neurons, cultured on a biomatrix substratum, studied by time-lapse cinematographic analysis using the transglutaminase inactivator RS-48373-007. Inhibition of cross-linking activity did not influence the number of neurites formed by granule neurons, but caused the destabilization of neurites during the initial outgrowth period, seen as an increase in the number of growth cone retractions and the onset of premature axon collateral formation (bifurcation). Inactivation of cross-linking activity prevented the formation of fascicles between neurites only when cells were cultured on a biomatrix surface. Two glial proteins involved in cell-extracellular matrix interactions, midkine and galectin-3, were identified as putative substrates for granule neuron transglutaminase. The results suggest that covalent cross-link formation by transglutaminase C or a related enzyme generates multimeric molecular forms of glial-derived proteins, and plays a role in stabilizing newly formed neurites. A possible non-pathological role for transglutaminase in the control of axon collateral branching by developing granule neurons in the cerebellar cortex is discussed.