Continuous turnover of epithelia is ensured by the extensive self-renewal capacity of tissue-specific stem cells. Similarly, epithelial tumour maintenance relies on cancer stem cells (CSCs), which co-opt stem cell properties. For most tumours, the cellular origin of these CSCs and regulatory pathways essential for sustaining stemness have not been identified. In murine skin, follicular morphogenesis is driven by bulge stem cells that specifically express CD34. Here we identify a population of cells in early epidermal tumours characterized by phenotypic and functional similarities to normal bulge skin stem cells. This population contains CSCs, which are the only cells with tumour initiation properties. Transplants derived from these CSCs preserve the hierarchical organization of the primary tumour. We describe beta-catenin signalling as being essential in sustaining the CSC phenotype. Ablation of the beta-catenin gene results in the loss of CSCs and complete tumour regression. In addition, we provide evidence for the involvement of increased beta-catenin signalling in malignant human squamous cell carcinomas. Because Wnt/beta-catenin signalling is not essential for normal epidermal homeostasis, such a mechanistic difference may thus be targeted to eliminate CSCs and consequently eradicate squamous cell carcinomas.