We found that cultured human keratinocytes with high proliferative potential, the putative epidermal stem cells, expressed a higher level of noncadherin-associated beta-catenin than populations enriched for keratinocytes of lower proliferative potential. To investigate the physiological significance of this, a series of beta-catenin constructs was introduced into keratinocytes via retroviral infection. Full-length beta-catenin and a mutant containing only nine armadillo repeats had little effect on proliferative potential in culture, the full-length protein being rapidly degraded. However, expression of stabilised, N-terminally truncated beta-catenin increased the proportion of putative stem cells to almost 90% of the proliferative population in vitro without inducing malignant transformation, and relieved the differentiation stimulatory effect of overexpressing the E-cadherin cytoplasmic domain. Conversely, beta-catenin lacking armadillo repeats acted as a dominant negative mutant and stimulated exit from the stem cell compartment in culture. The positive and negative effects of the beta-catenin mutants on proliferative potential were independent of effects on cell-cycle kinetics, overt terminal differentiation or intercellular adhesion, and correlated with stimulation or inhibition of transactivation of a TCF/LEF reporter in basal keratinocytes. We conclude that the elevated level of cytoplasmic beta-catenin in those keratinocytes with characteristics of epidermal stem cells contributes to their high proliferative potential.