AP-2 transcription factors have been implicated in epidermal biology, but their functional significance has remained elusive. Using conditional knockout technology, we show that AP-2α is essential for governing the balance between growth and differentiation in epidermis. In vivo, epidermis lacking AP-2α exhibits elevated expression of the epidermal growth factor receptor (EGFR) in the differentiating layers, resulting in hyperproliferation when the receptors are activated. Chromatin immunoprecipitation and promoter activity assays identify EGFR as a direct target gene for AP-2α repression, and, in the absence of AP-2α, this is manifested primarily in excessive EGF-dependent phosphoinositol-3 kinase/Akt activity. Together, our findings unveil a hitherto unrecognized repressive role for AP-2α in governing EGFR gene transcription as cells exit the basal layer and withdraw from the cell cycle. These results provide insights into why elevated AP-2α levels are often associated with terminal differentiation and why tumor cells often display reduced AP-2α and elevated EGFR proteins.