The hedgehog signaling network regulates pattern formation, proliferation, cell fate and stem/progenitor cell self-renewal in many organs. Altered hedgehog signaling is implicated in 20-25% of all cancers, including breast cancer. We demonstrated previously that heterozygous disruption of the gene encoding the patched-1 (PTCH1) hedgehog receptor, a negative regulator of smoothened (Smo) in the absence of ligand, led to mammary ductal dysplasia in virgin mice. We now show that expression of activated human SMO (SmoM2) under the mouse mammary tumor virus (MMTV) promoter in transgenic mice leads to increased proliferation, altered differentiation, and ductal dysplasias distinct from those caused by Ptch1 heterozygosity. SMO activation also increased the mammosphere-forming efficiency of primary mammary epithelial cells. However, limiting-dilution transplantation showed a decrease in the frequency of regenerative stem cells in MMTV-SmoM2 epithelium relative to wild type, suggesting enhanced mammosphere-forming efficiency was due to increased survival or activity of division-competent cell types under anchorage-independent growth conditions, rather than an increase in the proportion of regenerative stem cells per se. In human clinical samples, altered hedgehog signaling occurs early in breast cancer development, with PTCH1 expression reduced in approximately 50% of ductal carcinoma in situ (DCIS) and invasive breast cancers (IBC). Conversely, SMO is ectopically expressed in 70% of DCIS and 30% of IBC. Surprisingly, in both human tumors and MMTV-SmoM2 mice, SMO rarely colocalized with the Ki67 proliferation marker. Our data suggest that altered hedgehog signaling may contribute to breast cancer development by stimulating proliferation, and by increasing the pool of division-competent cells capable of anchorage-independent growth.