Overexpression of the type II transmembrane serine protease matriptase is a highly consistent feature of human epithelial tumors. Here we show that matriptase possesses a strong oncogenic potential when unopposed by its endogenous inhibitor, HAI-1. Modest orthotopic overexpression of matriptase in the skin of transgenic mice caused spontaneous squamous cell carcinoma and dramatically potentiated carcinogen-induced tumor formation. Matriptase-induced malignant conversion was preceded by progressive interfollicular hyperplasia, dysplasia, follicular transdifferentiation, fibrosis, and dermal inflammation. Furthermore, matriptase induced activation of the pro-tumorigenic PI3K-Akt signaling pathway. This activation was frequently accompanied by H-ras or K-ras mutations in carcinogen-induced tumors, whereas matriptase-induced spontaneous carcinoma formation occurred independently of ras activation. Increasing epidermal HAI-1 expression completely negated the oncogenic effects of matriptase. The data implicate dysregulated matriptase expression in malignant epithelial transformation.