Mammary gland factor (MGF) is a transcription factor discovered initially in the mammary epithelial cells of lactating animals. It confers the lactogenic hormone response to the milk protein genes. We reported recently the isolation of the cDNA encoding MGF. MGF is a novel member of the cytokine‐regulated transcription factor gene family. Members of this gene family mediate interferon alpha/beta and interferon gamma induction of gene transcription, as well as the response to epidermal growth factor and interleukin‐6, and have been named signal transducers and activators of transcription (Stat). The name Stat5 has been assigned to MGF. We studied the mechanisms involved in the prolactin activation of Stat5 in COS cells co‐transfected with cDNA encoding Stat5 and the prolactin receptor. Prolactin treatment of the transfected cells caused activation of Stat5 within 5‐10 min. This activation does not require ongoing protein synthesis. Tyrosine kinase inhibitors prevent Stat5 activation in transfected COS cells. Treatment of recombinant Stat5 with a tyrosine‐specific protein phosphatase in vitro abolishes its DNA binding activity. Prolactin stimulation of transfected cells induces Stat5 phosphorylation on tyrosine. Phosphorylation of in vitro transcribed and translated Stat5 with the Jak2 tyrosine kinase, but not with fyn, lyn or lck, confers DNA binding activity. The prolactin response of the beta‐casein milk protein gene promoter can be observed in COS cells transfected with cDNA vectors encoding Stat5 and the long form of the prolactin receptor. The short form of the prolactin receptor is unable to promote Stat5 phosphorylation and confer transcriptional induction in COS cells.(ABSTRACT TRUNCATED AT 250 WORDS)