Activation of the aryl hydrocarbon receptor (AHR), an environment-sensing transcription factor, causes profound impairment of mammary gland differentiation during pregnancy. Defects include decreased ductal branching, poorly formed alveolar structures, suppressed expression of milk proteins, and failure to nutritionally support offspring. AHR is activated by numerous environmental toxins, such as 2,3,7,8-tetrachlorodibenzo-p-dioxin (TCDD), and plays an as yet poorly understood role in development and reproduction. To better understand how AHR activation affects pregnancy-associated mammary gland differentiation, we used a combination of ex vivo differentiation, mammary epithelial transplantation, and AHR-deficient mice to determine whether AHR modulates mammary development through a direct effect on mammary epithelial cells (MECs) or by altering paracrine or systemic factors that drive pregnancy-associated differentiation. Studies using mutant mice that express an AHR protein lacking the DNA-binding domain show that defects in pregnancy-associated differentiation require AHR:DNA interactions. We then used fluorescence-based cell sorting to compare changes in gene expression in MECs and whole mammary tissue to gain insight into affected signaling pathways. Our data indicate that activation of the AHR during pregnancy directly affects mammary tissue development via both a direct effect on MECs and through changes in cells of the fat pad, and point to gene targets in MECs and stromal tissues as putative AHR targets.