Stratified epithelium contains a mitotically active basal layer of cells that cease proliferating, then migrate outwards and undergo terminal differentiation. The control of this process, which is abnormal in cutaneous neoplasia and inflammation, is not well understood. In normal epidermis, NF-κB proteins were found to exist in the cytoplasm of basal cells and then to localize in the nuclei of suprabasal cells, suggesting a role for NF-κB in the switch from proliferation to growth arrest and differentiation. Functional blockade of NF-κB by expressing dominant-negative NF-κB inhibitory proteins in transgenic murine and human epidermis produced hyperplastic epithelium in vivo. Consistent with this, application of a pharmacologic inhibitor of NF-κB to intact skin induced epidermal hyperplasia. In contrast, overexpression of active p50 and p65 NF-κB subunits in transgenic epithelium produced hypoplasia and growth inhibition. These data suggest that spatially restricted NF-κB activation occurs in stratified epithelium and indicate that NF-κB activation in this tissue, in contrast to its role in other settings, is important for cellular growth inhibition.