To study the contribution of autocrine and paracrine TGF-beta 1 to tumor progression in a well-defined system of multistage carcinogenesis, keratinocytes with a targeted deletion of the TGF-beta 1 gene were initiated in vitro with the v-rasHa oncogene and their in vivo tumorigenic properties were determined by skin grafting initiated cells onto athymic mice in combination with either wild-type or null dermal fibroblasts. Grafts of v-rasHa-initiated null keratinocytes progressed rapidly to multifocal squamous cell carcinomas within dysplastic papillomas irrespective of the fibroblast genotype, whereas the initiated control genotypes formed well-differentiated papillomas. Malignant progression was not associated with mutations in the c-rasHa gene, alterations in p53 protein, or loss of responsiveness to TGF-beta 1. The tumor cell labeling index was elevated in grafts of initiated null keratinocytes with wild-type fibroblasts compared to tumors of other genotypes. However, labeling index in all tumors was reduced when TGF-beta 1 null fibroblasts formed the stroma. The null tumor cells could not accumulate TGF-beta 1 from the host, but grafts of uninitiated null keratinocytes, which formed a normal epidermis, became TGF-beta 1 positive even though they did not express TGF-beta 1 mRNA. These results demonstrate that autocrine TGF-beta 1 suppresses the frequency and rate of malignant progression, and that autocrine and paracrine TGF-beta 1 can have opposing effects on tumor cell proliferation. The lack of paracrine inhibition of tumor cell progression appears to result from the inability of tumor cells to localize host-derived TGF-beta 1 by a mechanism that operates in normal cells.