Transforming growth factor-beta1 (TGF-beta 1) is a pluripotent cytokine that can inhibit epithelial proliferation and induce apoptosis, but is also widely implicated in breast cancer progression. Understanding its biological action in mammary development is critical for understanding its role in cancer. TGF-beta 1 is produced as a latent complex that requires extracellular activation before receptor binding. To better understand the spatial and temporal regulation of its action during mammary gland development, we examined the pattern of activation in situ using antibodies selected to distinguish between latent and active TGF-beta. Activation was highly restricted. TGF-beta 1 activation was localized primarily to the epithelium, and within the epithelium it was restricted to luminal epithelial cells but absent from either cap or myoepithelial cells. Within the luminal epithelium, we noted a further restriction. During periods of proliferation (ie, puberty, estrus and pregnancy), which are stimulated by ovarian hormones, TGF-beta 1 activation decreased in some cells, consistent with preparation for proliferation. Paradoxically, other cells simultaneously increase TGF-beta 1 immunoreactivity, which suggests that TGF-beta 1 differentially restrains epithelial subpopulations from responding to hormonal signals to proliferate. These data suggest that endogenous TGF-beta 1 activation and thus activity are regulated by ovarian hormones. To determine the specific consequences of TGF-beta 1 activity, we manipulated TGF-beta 1 levels in vivo using Tgfbeta 1 knockout mice and undertook tissue recombination experiments with heterozygous tissue. In Tgfbeta 1 heterozygous mice, which have <10% wild-type levels of TGF-beta1, ductal development during puberty and alveolar development during pregnancy were accelerated, consistent with its role as a growth inhibitor. The proliferative index of Tgfbeta 1+/- epithelium was increased approximately twofold in quiescent tissue and fourfold in proliferating tissue but both ducts and alveoli were grossly and histologically normal. To test whether epithelial TGF-beta1 was critical to the proliferative phenotype, Tgfbeta 1+/+ and +/- epithelium were transplanted into +/+ mammary stroma. The outgrowth of Tgfbeta 1+/- epithelium was accelerated in wild-type hosts, indicating that the phenotype was intrinsic to the epithelium. Moreover, proliferation was 15-fold greater in Tgfbeta 1+/- than wild-type mice after ovariectomy and treatment with estrogen and progesterone, suggesting that TGF-beta 1 acts in an autocrine or juxtacrine manner to regulate epithelial proliferation. Together these data indicate that ovarian hormones regulate TGF-beta 1 activation, which in turn restricts proliferative response to hormone signaling.