Accumulating evidence suggests that Notch3 (N3) is involved in breast cancer development, but its precise contributions are not well understood. Here, we report that pregnant mice expressing an activated intracellular form of N3 (N3(IC)) exhibit a cyclin D1-dependent expansion of premalignant CD24(+) CD29(low) luminal progenitors with enhanced differentiation potential in vitro and in vivo. Parous mice developed luminal mammary tumors in a cyclin D1-dependent manner. Notably, mice expressing higher levels of N3(IC) exhibited tumors resembling inflammatory breast cancer that frequently metastasized. N3(IC)-induced tumors contained a large percentage of tumor-initiating cells, but these were reduced significantly in tumors derived from N3(IC) transgenic mice that were heterozygous for cyclin D1. After transplantation in the presence of normal mammary cells, N3(IC)-expressing tumor cells became less malignant, differentiating into CK6(+) CK18(+) CK5(-) alveolar-like structures akin to expanded luminal progenitors from which they were likely derived. Taken together, our results argue that activated N3 signaling primarily affects luminal progenitors among mammary cell subsets, with more pronounced levels of activation influencing tumor type, and provide a novel model of inflammatory breast cancer.