Malignant melanoma is a cancer whose incidence is rising rapidly, but the mechanism by which normal melanocytes become malignant in vivo is still little understood. In the course of melanoma progression, a fraction of cells often becomes depigmented, which reflects the loss of the balance between mitogenic activities and differentiation in those pigment cells. A key factor involved in differentiation in pigment cells is mitogen-activated protein kinase (MAPK). However, because both activation and inhibition of MAPK signaling is known to correlate with differentiation, its function in pigment cells is still unclear. We investigated the role of MAPK signaling in pigment cells using the melanoma-inducing receptor tyrosine kinase Xmrk. Xmrk signaling in mouse melanocytes suppressed differentiation and induced a transformed phenotype. We found that this was based on sustained MAPK activation caused by low and transient expression of MAPK-phosphatase MKP-1. The Src kinase p59(Fyn) was thereby identified as being crucial for the receptor-mediated suppression of differentiation by down-regulating MKP-1 expression. Our findings reveal a novel mechanism of regulating the balance between differentiation and proliferation based on a Src kinase-modified MAPK activity. Moreover, they point to a new role for Src kinases in dedifferentiation and transformation of pigment cells.