Mice deficient for cathepsin L (CTSL) show epidermal hyperplasia due to a hyperproliferation of basal keratinocytes. Here we show that the critical function of CTSL in the skin is keratinocyte specific. This is revealed by transgenic re-expression of CTSL in the keratinocytes of ctsl^-/- mice, resulting in a rescue of the ctsl^-/- skin phenotype. Cultivation of primary mouse keratinocytes with fibroblast- and keratinocyte-conditioned media, as well as heterologous organotypic co-cultures of mouse fibroblasts and human keratinocytes, showed that the altered keratinocyte proliferation is caused primarily by CTSL-deficiency in keratinocytes. In the absence of EGF, wild type and CTSL-knockout keratinocytes proliferate with the same rates, while in presence of EGF, ctsl^-/- keratinocytes showed enhanced proliferation compared with controls. Internalization and degradation of radioactively labeled EGF was identical in both ctsl^-/- and ctsl^+/+ keratinocytes. However, ctsl^-/- keratinocytes recycled more EGF to the cell surface, where it is bound to the EGF-receptor, which is also more abundant in ctsl^-/- cells. We conclude that the hyperproliferation of keratinocytes in CTSL-knockout mice is caused by an enhanced recycling of growth factors and growth factor receptors from the endosomes to the keratinocyte plasma membrane, which result in sustained growth stimulation.