Krüppel-like factor5 (Klf5) is a zinc-finger transcription factor normally expressed in the skin. Here, we show that overexpression of Klf5 in the basal layer of the epidermis during embryogenesis affects epidermal development and disrupts epithelial-mesenchymal interactions necessary for skin adnexae formation as well as craniofacial morphogenesis. The transgenic mice exhibited exencephaly, craniofacial defects, persistent abdominal herniation and ectodermal dysplasia. Moreover, the epidermis was hypoplastic and underwent abnormal differentiation with expression of keratin8, a marker for single-layered epithelia, in the stratified epidermis. Correspondingly, we observed a downregulation of DeltaNp63 expression in the skin. Overexpression of Klf5 in adult mice led to hyperkeratosis, follicle occlusion and epidermal erosions. Further, we observed decrease and even loss of the stem cell population of bulge keratinocytes, as characterized by the expression pattern of alpha6 integrin and CD34 markers. Our data suggest a new role of Klf5 as a modulator of p63 expression and the differentiation program of epidermal cells relevant for regenerative potential of the epidermis and epithelial-mesenchymal interactions.