Astrocytes are the most abundant cell of the CNS and demonstrate contact inhibition in which a nonproliferative, nonmotile cellular state is achieved once stable intercellular contacts are formed between mature cells. Cellular injury disrupts these intercellular contacts, causing a loss of contact inhibition and the rapid initiation of healing. Dysregulation of the molecular pathways involved in this process is thought to lead to an aggressive cellular state associated with neoplasia. We investigated whether a comparable correlation exists between the response of astrocytes to injury and the malignant phenotype of astrocytomas. We discovered that the loss of contact inhibition plays a critical role in the initiation and regulation of reactive astrocytes in the healing of wounds. In particular, injury of the astrocytes interrupts and destabilizes the cadherin-catenin complexes at the cell membrane leading to nuclear translocation of β-catenin and characteristic changes associated with the activation of astrocytes. Similar signaling pathways are found to be active--but dysregulated--in astrocytomas. Inhibition of β-catenin signaling diminished both the response of astrocytes to injury and induction of the malignant phenotype of astrocytomas. The findings shed light on a unique mechanism associated with the pathogenesis of astrocytomas and provide a model for the loss of contact inhibition that may broadly apply to understanding the mechanisms of tissue repair and tumorigenesis in the brain.