Smad4 is the common mediator for TGFbeta signals, which play important functions in many biological processes. To study the role of Smad4 in skin development and epidermal tumorigenesis, we disrupted this gene in skin using the Cre-loxP approach. We showed that absence of Smad4 blocked hair follicle differentiation and cycling, leading to a progressive hair loss of mutant (MT) mice. MT hair follicles exhibited diminished expression of Lef1, and increased proliferative cells in the outer root sheath. Additionally, the skin of MT mice exhibited increased proliferation of basal keratinocytes and epidermal hyperplasia. Furthermore, we provide evidence that the absence of Smad4 resulted in a block of both TGFbeta and bone morphogenetic protein (BMP) signaling pathways, including p21, a well-known cyclin-dependent kinase inhibitor. Consequently, all MT mice developed spontaneous malignant skin tumors from 3 months to 13 months of age. The majority of tumors are malignant squamous cell carcinomas. A most notable finding is that tumorigenesis is accompanied by inactivation of phosphatase and tensin homolog deleted on chromosome 10 (Pten), activation of AKT, fast proliferation and nuclear accumulation of cyclin D1. These observations revealed the essential functions of Smad4-mediated signals in repressing skin tumor formation through the TGFbeta/BMP pathway, which interacts with the Pten signaling pathway.