Breast epithelial cells differentiate into tubules when cultured in floating three-dimensional (3D) collagen gels, but not when the cells are cultured in the same collagen matrix that is attached to the culture dish. These observations suggest that the biophysical properties of collagenous matrices regulate epithelial differentiation, but the mechanism by which this occurs is unknown. Tubulogenesis required the contraction of floating collagen gels through Rho and ROCK-mediated contractility. ROCK-mediated contractility diminished Rho activity in a floating 3D collagen gel, and corresponded to a loss of FAK phosphorylated at Y397 localized to 3D matrix adhesions. Increasing the density of floating 3D collagen gels also disrupted tubulogenesis, promoted FAK phosphorylation, and sustained high Rho activity. These data demonstrate the novel finding that breast epithelial cells sense the rigidity or density of their environment via ROCK-mediated contractility and a subsequent down-regulation of Rho and FAK function, which is necessary for breast epithelial tubulogenesis to occur.