Transforming growth factor-beta is released from most cells as an inactive complex consisting of transforming growth factor-beta, the transforming growth factor-beta propeptide and the latent transforming growth factor-beta-binding protein. We studied the role of latent transforming growth factor-beta-binding protein in modulating transforming growth factor-beta availability by generating transgenic mice that express a truncated form of latent transforming growth factor-beta-binding protein-1 that binds to transforming growth factor-beta but is missing the known N- and C-terminal matrix-binding sequences. As transforming growth factor-beta is an inhibitor of keratinocyte proliferation and is involved in the control of hair cycling, we over-expressed the mutated form of latent transforming growth factor-beta-binding protein under the control of the keratin 14-promoter. Transgenic animals displayed a hair phenotype due to a reduction in keratinocyte proliferation, an abbreviated growth phase and an early initiation of the involution (catagen) phase of the hair cycle. This phenotype appears to result from excess active transforming growth factor-beta, as enhanced numbers of pSmad2/3-positive nuclei are observed in transgenic animal skin. These data suggest that the truncated form of latent transforming growth factor-beta-binding protein-1 competes with wild-type latent transforming growth factor-beta-binding protein for binding to latent transforming growth factor-beta, resulting in latent transforming growth factor-beta complexes that fail to be targeted correctly in the extracellular matrix. The mis-localization of the transforming growth factor-beta results in inappropriate activation and premature initiation of catagen, thereby illustrating the significance of latent transforming growth factor-beta-binding protein interaction with transforming growth factor-beta in the targeting and activation of latent transforming growth factor-beta in addition to previously reported effects on small latent complex secretion.