Mammary gland development is controlled by systemic hormones and by growth factors that might complement or mediate hormonal action. Peptides that locally signal growth cessation and stimulate differentiation of the developing epithelium have not been described. Here, we report that recombinant and wild-type forms of mammary-derived growth inhibitor (MDGI) and heart-fatty acid binding protein (FABP), which belong to the FABP family, specifically inhibit growth of normal mouse mammary epithelial cells (MEC), while growth of stromal cells is not suppressed. In mammary gland organ culture, inhibition of ductal growth is associated with the appearance of bulbous alveolar end buds and formation of fully developed lobuloalveolar structures. In parallel, MDGI stimulates its own expression and promotes milk protein synthesis. Selective inhibition of endogenous MDGI expression in MEC by antisense phosphorothioate oligonucleotides suppresses appearance of alveolar end buds and lowers the beta-casein level in organ cultures. Furthermore, MDGI suppresses the mitogenic effects of epidermal growth factor, and epidermal growth factor antagonizes the activities of MDGI. Finally, the regulatory properties of MDGI can be fully mimicked by an 11-amino acid sequence, represented in the COOH terminus of MDGI and a subfamily of structurally related FABPs. This peptide does not bind fatty acids. To our knowledge, this is the first report about a growth inhibitor promoting mammary gland differentiation.