The molecular mechanism via which keratinocyte differentiation assembles multiple layers of cells (stratification) is poorly understood. We describe here a novel function of the Rho family member RhoE as a regulator of epidermal morphogenesis. RhoE protein levels are specifically and transiently up-regulated upon keratinocyte differentiation. RhoE up-regulation requires the activity of Rho kinase (ROCK) I, suggesting that both RhoE and ROCKI are important during keratinocyte differentiation. RhoE overexpression results in a striking enlargement of cell size and the number of stratified cells. In contrast, RhoE depletion induces hyperproliferation and delays initiation of keratinocyte differentiation. Interestingly, up-regulation of RhoE protein is seen primarily in basal, undifferentiated cells, in which commitment to differentiation and stratification takes place. RhoE activation in basal cells negatively modulates integrin adhesion, thereby facilitating detachment from the substratum and migration to form suprabasal layers. Thus, RhoE integrates two processes essential for keratinocyte differentiation and stratification: regulation of proliferative status and integrin adhesion.