Wingless (Wnt)/β-catenin signaling plays an essential role during normal development, is a critical regulator of stem cells, and has been associated with cancer in many tissues. Here we demonstrate that genetic expression of a degradation-resistant mutant form of β-catenin in early Rathke's pouch (RP) progenitors leads to pituitary hyperplasia and severe disruption of the pituitary-specific transcription factor 1-lineage differentiation resulting in extreme growth retardation and hypopituitarism. Mutant mice mostly die perinatally, but those that survive weaning develop lethal pituitary tumors, which closely resemble human adamantinomatous craniopharyngioma, an epithelial tumor associated with mutations in the human β-catenin gene. The tumorigenic effect of mutant β-catenin is observed only when expressed in undifferentiated RP progenitors, but tumors do not form when committed or differentiated cells are targeted to express this protein. Analysis of affected pituitaries indicates that expression of mutant β-catenin leads to a significant increase in the total numbers of pituitary progenitor/stem cells as well as in their proliferation potential. Our findings provide insights into the role of the Wnt pathway in normal pituitary development and demonstrate a causative role for mutated β-catenin in an undifferentiated RP progenitor in the genesis of murine and human craniopharyngioma.