Mammary anlagen are formed in the embryo as a derivative of the epidermis, a process that is controlled by Lef-1 and therefore possibly by beta-catenin. To investigate the role of beta-catenin signaling in mammary alveolar epithelium, we have stabilized endogenous beta-catenin in differentiating alveolar epithelium through the deletion of exon 3 (amino acids 5-80) of the beta-catenin gene. This task was accomplished in mice carrying a floxed beta-catenin gene and a Cre transgene under control of the mammary-specific whey acidic protein (WAP) gene promoter or the mouse mammary tumor virus-long terminal repeat (MMTV-LTR). Stabilized beta-catenin was obtained during the first pregnancy, and its presence resulted in the dedifferentiation of alveolar epithelium followed by a transdifferentiation into epidermal and pilar structures. Extensive squamous metaplasia, but no adenocarcinomas, developed upon beta-catenin activation during pregnancy and persisted throughout involution. These data demonstrate that the activation of beta-catenin signaling induces a program that results in loss of mammary epithelial cell differentiation and induction of epidermal structures.