Bone morphogenetic proteins (BMPs) play pivotal roles in the regulation of skin development. To study the role of BMPs in skin tumorigenesis, BMP antagonist noggin was used to generate keratin 14-targeted transgenic mice. In contrast to wild-type mice, transgenic mice developed spontaneous hair follicle-derived tumors, which resemble human trichofolliculoma. Global gene expression profiles revealed that in contrast to anagen hair follicles of wild-type mice, tumors of transgenic mice showed stage-dependent increases in the expression of genes encoding the selected components of Wnt and Shh pathways. Specifically, expression of the Wnt ligands increased at the initiation stage of tumor formation, whereas expression of the Wnt antagonist and tumor suppressor Wnt inhibitory factor-1 decreased, as compared with fully developed tumors. In contrast, expression of the components of Shh pathway increased in fully developed tumors, as compared with the tumor placodes. Consistent with the expression data, pharmacological treatment of transgenic mice with Wnt and Shh antagonists resulted in the stage-dependent inhibition of tumor initiation, and progression, respectively. Furthermore, BMP signaling stimulated Wnt inhibitory factor-1 expression and promoter activity in cultured tumor cells and HaCaT keratinocytes, as well as inhibited Shh expression, as compared with the corresponding controls. Thus, tumor suppressor activity of the BMPs in skin epithelium depends on the local concentrations of noggin and is mediated at least in part via stage-dependent antagonizing of Wnt and Shh signaling pathways.