Abstract Two subtypes of human bladder cancer, noninvasive papillary and muscle-invasive cancer, develop through independent pathologic and molecular pathways. Human invasive bladder cancer frequently develops without prior clinical evidence of a noninvasive tumor stage. However, an animal model that recapitulates this unique clinical progression of invasive bladder cancer has not yet been developed. In this study, we created a novel transgenic mouse model of invasive bladder cancer by targeting an active dimerized form of Stat3 to the basal cells of bladder epithelium. When exposed to the carcinogen nitrosamine, Stat3-transgenic mice developed invasive cancer directly from carcinoma in situ (CIS), bypassing the noninvasive papillary tumor stage. Remarkably, invasive bladder cancer driven by active Stat3 was predominantly composed of stem cells, which were characterized by cytokeratin 14 (CK14) staining and enhanced tumor sphere-forming ability. Active Stat3 was also shown to localize to the nucleus of human invasive bladder cancers that were primarily composed of CK14+ stem cells. Together, our findings show that Stat3-induced stem cell expansion plays a critical role in the unique clinical progression of invasive bladder cancer through the CIS pathway. Cancer Res; 72(13); 3135–42. ©2012 AACR.