Dysregulated gene expression resulting from abnormal epigenetic alterations including histone acetylation and deacetylation has been demonstrated to play an important role in driving tumor growth and progression. However, the mechanisms by which specific histone deacetylases (HDACs) regulate differentiation in solid tumors remains unclear. Using pediatric rhabdomyosarcoma (RMS) as a paradigm to elucidate the mechanism blocking differentiation in solid tumors, we identified HDAC3 as a major suppressor of myogenic differentiation from a high-efficiency Clustered regularly interspaced short palindromic repeats (CRISPR)-based phenotypic screen of class I and II HDAC genes. Detailed characterization of the HDAC3-knockout phenotype in vitro and in vivo using a tamoxifen-inducible CRISPR targeting strategy demonstrated that HDAC3 deacetylase activity and the formation of a functional complex with nuclear receptor corepressors (NCORs) were critical in restricting differentiation in RMS. The NCOR/HDAC3 complex specifically functions by blocking myoblast determination protein 1 (MYOD1)-mediated activation of myogenic differentiation. Interestingly, there was also a transient up-regulation of growth-promoting genes upon initial HDAC3 targeting, revealing a unique cancer-specific response to the forced transition from a neoplastic state to terminal differentiation. Our study applied modifications of CRISPR/CRISPR-associated endonuclease 9 (Cas9) technology to interrogate the function of essential cancer genes and pathways and has provided insights into cancer cell adaptation in response to altered differentiation status. Because current pan-HDAC inhibitors have shown disappointing results in clinical trials of solid tumors, therapeutic targets specific to HDAC3 function represent a promising option for differentiation therapy in malignant tumors with dysregulated HDAC3 activity.