Matrix metalloproteinase (MMP)-3 is induced by multiple cell types in the skin during processes involved in both normal and pathological tissue remodeling. We previously demonstrated that MMP3-null animals have an increased sensitivity to the development of squamous cell carcinoma, suggesting that overall, MMP3 has a protective role in squamous cell carcinoma. However, not all cellular responses affected by a loss of MMP3 are tumor-protective, and tumor expression of MMP3 is co-incident with an invasive tumor phenotype. Transgenic mice were generated with MMP3 targeted to keratinocytes to examine the biological role of tumor-produced MMP3. Overexpression of MMP3 reduced tumor multiplicity in response to chemically induced squamous cell carcinoma. Vascular density was increased with MMP3 overexpression; however, other cellular processes, including tumor growth and leukocyte infiltration, were unaffected. In accordance with the change in tumor multiplicity, SP-1 murine papilloma cell lines that were generated to stably express MMP3 lost the capacity to establish palpable tumors following orthotopic injection into immunocompromised mice. Analysis of epidermal biopsies taken at 1 to 2 weeks postinjection revealed that these MMP3-expressing Sp-1 lines had reduced levels of proliferation and pronounced differentiation. These same cells demonstrated an increased ability to differentiate in vitro, an effect that was inhibited by broad-spectrum MMP and selective MMP3 inhibition. These studies suggest that keratinocyte expression of MMP3 promotes cellular differentiation, impeding tumor establishment during tumorigenesis.