Walleye dermal sarcoma (WDS) is a common disease of walleye fish in the United States and Canada. These proliferative lesions are present autumn through winter and regress in the spring. Walleye dermal sarcoma virus (WDSV), a retrovirus distantly related to other members of the family Retroviridae, has been etiologically linked to the development of WDS. We have reported that the D-cyclin homologue [retroviral (rv) cyclin] encoded by WDSV rescues yeast conditionally deficient for cyclin synthesis from growth arrest and that WDSV-cyclin mRNA is present in developing tumors. These data strongly suggest that the rv-cyclin plays a central role in the development of WDS. To test the ability of the WDSV rv-cyclin to induce cell proliferation, we have generated transgenic mice expressing the rv-cyclin in squamous epithelia from the bovine keratin-5 promoter. The transgenic animals were smaller than littermates, had reduced numbers of hair follicles, and transgenic females did not lactate properly. Following injury the transgenic animals developed severe squamous epithelial hyperplasia and dysplasia with ultrastructural characteristics of neoplastic squamous epithelium. Immunocytochemistry studies demonstrated that the hyperplastic epithelium stained positive for cytokeratin and were abnormally differentiated. Furthermore, the rv-cyclin protein was detected in the thickened basal cell layers of the proliferating lesions. These data are the first to indicate that the highly divergent WDSV rv-cyclin is a very potent stimulator of eukaryotic cell proliferation and to demonstrate the potential of a cyclin homologue encoded by a retrovirus to induce hyperplastic skin lesions.