Tyrosine phosphorylation plays a fundamental role in mammary gland development. However, the role of specific tyrosine phosphatases in controlling mammary cell fate remains ill defined. We have identified protein tyrosine phosphatase 1B (PTP1B) as an essential regulator of alveologenesis and lactogenesis. PTP1B depletion increased the number of luminal mammary progenitors in nulliparous mice, leading to enhanced alveoli formation upon pregnancy. Mechanistically, Ptp1b deletion enhanced the expression of progesterone receptor and phosphorylation of Stat5, two key regulators of alveologenesis. Furthermore, glands from Ptp1b knockout mice exhibited increased expression of milk proteins during pregnancy due to enhanced Stat5 activation. These findings reveal that PTP1B constrains the number of mammary progenitors and thus prevents inappropriate onset of alveologenesis in early pregnancy. Moreover, PTP1B restrains the expression of milk proteins during pregnancy and thus prevents premature lactogenesis. Our work has implications for breast tumorigenesis because Ptp1b deletion has been shown to prevent or delay the onset of mammary tumors.