Abstract Cripto-1 is an epidermal growth factor-Cripto/FRL1/Cryptic family member that plays a role in early embryogenesis as a coreceptor for Nodal and is overexpressed in human tumors. Here we report that in the two-stage mouse skin carcinogenesis model, Cripto-1 is highly up-regulated in tumor promoter–treated normal skin and in benign papillomas. Treatment of primary mouse keratinocytes with Cripto-1 stimulated proliferation and induced expression of keratin 8 but blocked induction of the normal epidermal differentiation marker keratin 1, changes that are hallmarks of tumor progression in squamous cancer. Chemical or genetic blockade of the transforming growth factor (TGF)-β1 signaling pathway using the ALK5 kinase inhibitor SB431542 and dominant negative TGF-β type II receptor, respectively, had similar effects on keratinocyte differentiation. Our results show that Cripto-1 could block TGF-β1 receptor binding, phosphorylation of Smad2 and Smad3, TGF-β–responsive luciferase reporter activity, and TGF-β1–mediated senescence of keratinocytes. We suggest that inhibition of TGF-β1 by Cripto-1 may play an important role in altering the differentiation state of keratinocytes and promoting outgrowth of squamous tumors in the mouse epidermis. (Mol Cancer Res 2008;6(3):509–16)