The tumour microenvironment can be a potent carcinogen, not only by facilitating cancer progression and activating dormant cancer cells, but also by stimulating tumour formation. We have previously investigated stromelysin-1/matrix metalloproteinase-3 (MMP-3), a stromal enzyme upregulated in many breast tumours, and found that MMP-3 can cause epithelial-mesenchymal transition (EMT) and malignant transformation in cultured cells, and genomically unstable mammary carcinomas in transgenic mice. Here we explain the molecular pathways by which MMP-3 exerts these effects: exposure of mouse mammary epithelial cells to MMP-3 induces the expression of an alternatively spliced form of Rac1, which causes an increase in cellular reactive oxygen species (ROS). The ROS stimulate the expression of the transcription factor Snail and EMT, and cause oxidative damage to DNA and genomic instability. These findings identify a previously undescribed pathway in which a component of the breast tumour microenvironment alters cellular structure in culture and tissue structure in vivo, leading to malignant transformation.