It was previously demonstrated that differentiation of some established breast epithelial cell lines requires confluence and stimulation with hydrocortisone, insulin and prolactin inducers. We and others previously demonstrated that E-cadherin engagement, which is favored under conditions of confluence, increases the levels and activity of the Rac small GTPase. To investigate the functional relationship between the transforming ability of Rac and its role as an integral component of the differentiative E-cadherin signaling pathway, we introduced a mutationally activated form of Rac, RacV12, into the mouse breast epithelium-derived cell line, HC11. Our results demonstrate that the strength of the Rac signal is key for the outcome of the differentiation process; cRac1 is critically required for differentiation, and at low levels, mutationally activated RacV12 is able to increase differentiation, presumably reinforcing the E-cadherin/Rac differentiative signal. However, high RacV12 expression blocked differentiation concomitant with E-cadherin downregulation, while inducing neoplastic transformation. Therefore, the intensity of the Rac signal is a central determinant in the balance between cell proliferation vs differentiation, two fundamentally opposed processes, a finding which could also have important therapeutic implications.