Intestinal epithelial integrity and polarity are maintained by cohesive interactions between cells via the formation of tight junctions. Irregularities in tight junctions have only recently been found to be associated with the initiation and progression of intestinal neoplasia. The claudin family of proteins is integral to the structure and function of the tight junction but little is known of the molecular events that regulate the expression of these components. The present report identifies cathepsin L, classically a lysosomal cysteine protease, as being induced during intestinal epithelial cell polarization and differentiation. Inhibition of intracellular cathepsin L activity results in the accumulation of disorganized cell layers and a decline in the expression of differentiation markers in cultured intestinal epithelial cells. This coincides with a rapid up-regulation of claudin-1 protein accumulation. Mutant mice defective in cathepsin L activity (furless) display an elevated level of intestinal claudin-1 and claudin-2 expression. Loss of cathepsin L activity leads to a marked increase in tumor multiplicity in the intestine of Apc(Min) mice. Given the traditionally viewed biological role of cathepsin L in the processing of lysosomal content as well as in pathological extracellular matrix remodeling, the results here demonstrate an as yet unsuspected intracellular role for this protease in normal intestinal epithelial polarization and initiation of neoplasia.