Smad4 is the common mediator of transforming growth factor-β (TGF-β) superfamily signaling, which functions in diverse developmental processes in mammals. To study the role of Smad4 in skin development, a keratinocyte-specific null mutant of Smad4 (Smad4^co/co;K5-Cre) was generated in mice using the Cre-loxP system. The Smad4-mutant mice exhibited progressive alopecia as a result of the mutant hair follicles failing to undergo programmed regression. Sonic hedgehog (Shh) was only detected in Smad4-mutant hair follicles at the catagen stage. Seventy percent of Smad4^co/co; K5-Cre mice developed spontaneous tumors within 12 months of birth. c-Myc and cyclin D1 were up-regulated whereas p21 and p27 expressions were decreased, which correlated with the epidermal hyperplasia in Smad4 mutants. Interestingly, coordinated deletion of the Smad4 and PTEN genes resulted in accelerated hair loss and skin tumor formation, suggesting that Smad4 and PTEN act synergistically to regulate epidermal proliferation and differentiation. All of our data indicate that Smad4 is essential for catagen induction and acts as a critical suppressor in skin tumorigenesis.