The role and molecular mechanisms of a new Hippo signalling pathway are not fully understood in mammals. Here, we generated mice that lack WW45 and revealed a crucial role for WW45 in cell‐cycle exit and epithelial terminal differentiation. Many organs in the mutant mouse embryos displayed hyperplasia accompanied by defects in terminal differentiation of epithelial progenitor cells owing to impaired proliferation arrest rather than intrinsic acceleration of proliferation during differentiation. Importantly, the MST1 signalling pathway is specifically activated in differentiating epithelial cells. Moreover, WW45 is required for MST1 activation and translocation to the nucleus for subsequent LATS1/2 activation upon differentiation signal. LATS1/2 phosphorylates YAP, which, in turn, translocates from the nucleus into the cytoplasm, resulting in cell‐cycle exit and terminal differentiation of epithelial progenitor cells. Collectively, these data provide compelling evidence that WW45 is a key mediator of MST1 signalling in the coordinate coupling of proliferation arrest with terminal differentiation for proper epithelial tissue development in mammals.