The effect of the tumor promoter phorbol 12‐myristate 13‐acetate (PMA) on proliferation and differentiation of normal mammary epithelial cells from 50‐day‐old virgin rats was investigated using a model system that allows for full morphological and functional development of the cells. In this model, mammary epithelial cells are grown within a reconstituted basement membrane in a defined serum‐free medium. PMA at a concentration of 10−6 M effected translocation of protein kinase C from cytosol to membrane. At the same concentration, it stimulated cell proliferation both in the presence and absence of EGF, and this stimulation was observed even when PMA exposure was limited to 15 min at the time of each media change. In contrast to the effect on proliferation, PMA at concentrations of 10−7 and 10−6 M inhibited functional differentiation as assessed by casein accumulation. Phorbol 12,13‐dibutyrate at 10−6 M also stimulated proliferation and inhibited casein accumulation and was more effective than PMA in both cases. In contrast, the nonactive tumor promoter 4‐α PMA had no effect on either proliferation or differentiation. One of the most striking effects of PMA was its ability to stimulate an atypical ductal morphogenesis, as manifested by the formation of intricate web‐like colonies, and to inhibit the development of the well‐differentiated alveolar‐like multilobular colonies. PMA was also shown to completely suppress the growth of the squamous‐like colonies that develop when EGF is absent or deficient. These effects of phorbol esters in mammary epithelial cells to stimulate proliferation, inhibit functional differentiation, and stimulate the development of ductal colonies are consistent with the suggestion that the signal transduction pathways evoked by PMA could act to stimulate the growth of initiated cells or render normal cells more sensitive to carcinogen. © 1994 Wiley‐Liss, Inc.