There is increasing evidence that members of the TGF-beta superfamily are important regulators of epithelial growth and differentiation in vivo. Here, transgenic mice have been used to study the role of the TGF-beta-related growth factors BMP-2 and BMP-4 in hair and whisker development. In the mature hair follicle, BMP-2 transcripts are normally seen only in precortex cells at the base of the hair shaft. In the transgenic mice reported here, BMP-4, a closely related molecule, has been ectopically expressed in the outer root sheath of hair and whisker follicles using an expression vector based on the bovine cytokeratin IV* promoter. In response to transgene expression, both outer root sheath cells below the stem cell compartment and hair matrix cells around the dermal papilla cease proliferation. In addition, the expression pattern of cytokeratin markers is disturbed in some transgenic hair follicles. These results support a model in which members of the TGF-beta superfamily play an active role in the inhibiton of cell proliferation and the onset of expression of trichocyte-specific genes that take place when cells leave the matrix of the follicle and differentiate into shaft cells.