To examine the consequences of inhibiting activator protein-1 (AP-1) transcription factors in skin, transgenic mice were generated, which use the tetracycline system to conditionally express A-FOS, a dominant negative that inhibits AP-1 DNA binding. Older mice develop mild alopecia and hyperplasia of sebaceous glands, particularly around the eyes. When A-FOS was expressed during chemical-induced skin carcinogenesis, mice do not develop characteristic benign and malignant squamous lesions but instead develop benign sebaceous adenomas containing a signature mutation in the H-ras proto-oncogene. Inhibiting AP-1 activity after tumor formation caused squamous tumors to transdifferentiate into sebaceous tumors. Furthermore, reactivating AP-1 in sebaceous tumors results in a reciprocal transdifferentiation into squamous tumors. In both cases of transdifferentiation, individual cells express molecular markers for both cell types, indicating individual tumor cells have the capacity to express multiple lineages. Molecular characterization of cultured keratinocytes and tumor material indicates that AP-1 regulates the balance between the wnt/β-catenin and hedgehog signaling pathways that determine squamous and sebaceous lineages, respectively. Chromatin immunoprecipitation analysis indicates that c-Jun binds several wnt promoters, which are misregulated by A-FOS expression, suggesting that members of the wnt pathway can be a primary targets of AP-1 transcriptional regulation. Thus, AP-1 activity regulates tumor cell lineage and is essential to maintain the squamous tumor cell identity. (Cancer Res 2006; 66(15): 7578-88)