Fibroblasts within the mammary tumor microenvironment are active participants in carcinogenesis mediating both tumor initiation and progression. Our group has previously demonstrated that genetic loss of phosphatase and tensin homolog (PTEN) in mammary fibroblasts induces an oncogenic secretome that remodels the extracellular milieu accelerating ErbB2-driven mammary tumor progression. While these prior studies highlighted a tumor suppressive role for stromal PTEN, how the adjacent normal epithelium transforms in response to PTEN loss was not previously addressed. To identify these early events, we have evaluated both phenotypic and genetic changes within the pre-neoplastic mammary epithelium of mice with and without stromal PTEN expression. We report that fibroblast-specific PTEN deletion greatly restricts mammary ductal elongation and induces aberrant alveolar side-branching. These mice concomitantly exhibit an expansion of the mammary epithelial stem cell (MaSC) enriched basal/myoepithelial population and an increase in in vitro stem cell activity. Further analysis revealed that NOTCH signaling, specifically through NOTCH3, is diminished in these cells. Mechanistically, JAGGED-1, a transmembrane ligand for the NOTCH receptor, is downregulated in the PTEN-null fibroblasts leading to a loss in the paracrine activation of NOTCH signaling from the surrounding stroma. Reintroduction of JAGGED-1 expression within the PTEN-null fibroblasts was sufficient to abrogate the observed increase in colony forming activity implying a direct role for stromal JAGGED-1 in regulation of MaSC properties. Importantly, breast cancer patients whose tumors express both low stromal JAG1 and low stromal PTEN exhibit a shorter time to recurrence than those whose tumors express low levels of either alone suggesting similar stromal signaling in advanced disease. Combined, these results unveil a novel stromal PTEN-to-JAGGED-1 axis in maintaining the MaSC niche, and subsequently inhibiting breast cancer initiation and disease progression.