Epidermal and hair follicle development from surface ectodermal progenitor cells requires coordinated changes in gene expression. Histone deacetylases alter gene expression programs through modification of chromatin and transcription factors. We find that deletion of ectodermal Hdac1 and Hdac2 results in dramatic failure of hair follicle specification and epidermal proliferation and stratification, phenocopying loss of the key ectodermal transcription factor p63. Although expression of p63 and its positively regulated basal cell targets is maintained in Hdac1/2-deficient ectoderm, targets of p63-mediated repression, including p21, 14-3-3σ, and p16/INK4a, are ectopically expressed, and HDACs bind and are active at their promoter regions in normal undifferentiated keratinocytes. Mutant embryos display increased levels of acetylated p53, which opposes p63 functions, and p53 is required for HDAC inhibitor-mediated p21 expression in keratinocytes. Our data identify critical requirements for HDAC1/2 in epidermal development and indicate that HDAC1/2 directly mediate repressive functions of p63 and suppress p53 activity.