Smad4 is a central mediator for TGFβ signals, which play important functions in many biological processes. To study the role of Smad4 in mammary gland development and neoplasia, we disrupted this gene in mammary epithelium using a Cre-loxP approach. Smad4 is expressed in the mammary gland throughout development; however, its inactivation did not cause abnormal development of the gland during the first three pregnancies. Instead, lack of Smad4 gradually induced cell proliferation, alveolar hyperplasia and transdifferentiation of mammary epithelial cells into squamous epithelial cells. Consequently, all mutant mice developed squamous cell carcinoma and/or mammary abscesses between 5 and 16 months of age. We demonstrated that absence of Smad4 resulted in β-catenin accumulation at onset and throughout the process of transdifferentiation, implicating β-catenin, a key component of the Wnt signaling pathway, in the development of squamous metaplasia in Smad4-null mammary glands. We further demonstrated that TGFβ1 treatment degraded β-catenin and induced epithelial-mesenchymal transformation in cultured mammary epithelial cells. However, such actions were blocked in the absence of Smad4. These findings indicate that TGFβ/Smad4 signals play a role in cell fate maintenance during mammary gland development and neoplasia.