The mammary gland represents a unique model system to study gene functions in adult stem cells. Mammary stem cells (MaSCs) can regenerate a functional epithelium on transplantation into cleared fat pads. We studied the consequences of distinct genetic modifications of MaSCs on their repopulation and differentiation ability. The reconstitution of ductal trees was used as a stem cell selection procedure and the nearly quantitative lentiviral infection efficiency of the primary mammary epithelial cells (MECs) rendered the enrichment of MaSCs before their transplantation unnecessary. The repopulation frequency of transduced MaSCs was nearly 100% in immunodeficient recipients and the resulting transgenic ducts homogeneously expressed the virally encoded fluorescent marker proteins. Transplantation of a mixture of MECs, expressing different fluorescent proteins, resulted in a distinct pattern of ductal outgrowths originating from a small number of individually transduced MaSCs. We used genetically modified MECs to define multiple functions of Stat5 during mammary gland development and differentiation. Stat5-downregulation in MaSCs did not affect primary ductal outgrowth, but impaired side branching and the emergence of mature alveolar cells from luminal progenitors during pregnancy. Conversely, the expression of a constitutively active variant of Stat5 (cS5-F) caused epithelial hyperproliferation, thickening of the ducts and precocious, functional alveoli formation in virgin mice. Expression of cS5-F also prevented involution and caused the formation of estrogen and progesterone receptor positive (ER(+)PR(+)) adenocarcinomas. The tumors expressed activated Stat5 and Stat3 and contained a small fraction of CD44(+) cells, possibly indicative of cancer stem cells.