Signal transducer and activator of transcription (Stat) 5 appears to play a vital role in prolactin (PRL)‐induced cell differentiation and normal mammary gland development. We previously showed that PRL‐activated Stat5a induced expression of E‐cadherin–β‐catenin complex in vitro and in xenotransplant tumors in vivo led to inhibition of breast cancer invasion. In the present study, we show that human breast cancer cells co‐overexpressing Stat5a and its tyrosine kinase (Jak) 2 cultured in three‐dimensional (3D) Matrigel culture demonstrate changes consistent with induction of mesenchymal–epithelial redifferentiation. Jak2 and Stat5a‐co‐overexpressing cells treated with cocktail (PRL, dexamethasone, and insulin), effectively reverse epithelial–mesenchymal transition by stimulating 3D organoids more reminiscent of the acinar growth of normal mammary epithelial cells, compared with cells overexpressing only Stat5a or Jak2. In contrast, dominant‐negative dominant‐negative‐Stat5 blocks 3D organoid formation, causing cells to grow in layers instead. Hyperactivation of Jak2 and Stat5a in T‐47D cells induces alveolar‐like structures, mamospheres, with marked lumen formation through central apoptosis and restores a polarized epithelial phenotype. However, Jak2 and Stat5a overexpression in BT‐20 cells induces partially differentiated 3D organoids with no central lumen, but effectively re‐expresses estrogen receptor α. Jak2 and Stat5a‐induced 3D differentiated organoids are accompanied by increased expression of E‐cadherin, zonula occludens‐1, and cytokeratins 8 and 18, and decreased levels of vimentin and Snail, indicating a shift from a mesenchymal phenotype toward an epithelial phenotype. Collectively, Jak2 and Stat5a co‐overexpression cooperatively reverses epithelial–mesenchymal transition and promotes differentiation in human breast cancer cells, which may provide a mechanism to explain the invasive suppressor role of PRL‐activated Stat5a in mammary cancer cells. (Cancer Sci 2008; 99: 272–279)