Abstract Introduction The molecular circuitry of different cell types dictates their normal function as well as their response to oncogene activation. For instance, mice lacking the Wip1 phosphatase (also known as PPM1D; protein phosphatase magnesium-dependent 1D) have a delay in HER2/neu (human epidermal growth factor 2), but not Wnt1-induced mammary tumor formation. This suggests a cell type-specific reliance on Wip1 for tumorigenesis, because alveolar progenitor cells are the likely target for transformation in the MMTV(mouse mammary tumor virus)-neu but not MMTV-wnt1 breast cancer model. Methods In this study, we used the Wip1-knockout mouse to identify the cell types that are dependent on Wip1 expression and therefore may be involved in the early stages of HER2/neu-induced tumorigenesis. Results We found that alveolar development during pregnancy was reduced in Wip1-knockout mice; however, this was not attributable to changes in alveolar cells themselves. Unexpectedly, Wip1 allows steroid hormone-receptor-positive cells but not alveolar progenitors to activate STAT5 (signal transducer and activator of transcription 5) in the virgin state. In the absence of Wip1, hormone-receptor-positive cells have significantly reduced transcription of RANKL (receptor activator of nuclear factor kappa-B ligand) and IGF2 (insulin-like growth factor 2), paracrine stimulators of alveolar development. In the MMTV-neu model, HER2/neu activates STAT5 in alveolar progenitor cells independent of Wip1, but HER2/neu does not override the defect in STAT5 activation in Wip1-deficient hormone-sensing cells, and paracrine stimulation remains attenuated. Moreover, ERK (extracellular signal-regulated kinase) activation by HER2/neu in hormone-sensing cells is also Wip1 dependent. Conclusions We identified Wip1 as a potentiator of prolactin and HER2/neu signaling strictly in the molecular context of hormone-sensing cells. Furthermore, our findings highlight that hormone-sensing cells convert not only estrogen and progesterone but also prolactin signals into paracrine instructions for mammary gland development. The instructive role of hormone-sensing cells in premalignant development suggests targeting Wip1 or prolactin signaling as an orthogonal strategy for inhibiting breast cancer development or relapse.