beta-Catenin is an essential molecule in Wnt/wingless signaling, which controls decisive steps in embryogenesis. To study the role of beta-catenin in skin development, we introduced a conditional mutation of the gene in the epidermis and hair follicles using Cre/loxP technology. When beta-catenin is mutated during embryogenesis, formation of placodes that generate hair follicles is blocked. We show that beta-catenin is required genetically downstream of tabby/downless and upstream of bmp and shh in placode formation. If beta-catenin is deleted after hair follicles have formed, hair is completely lost after the first hair cycle. Further analysis demonstrates that beta-catenin is essential for fate decisions of skin stem cells: in the absence of beta-catenin, stem cells fail to differentiate into follicular keratinocytes, but instead adopt an epidermal fate.