Notch signalling is implicated in stem and progenitor cell fate control in numerous organs. Using conditional in vivo genetic labelling we traced the fate of cells expressing the Notch2 receptor paralogue and uncovered the existence of two previously unrecognized mammary epithelial cell lineages that we term S (Small) and L (Large). S cells appear in a bead-on-a-string formation and are embedded between the luminal and basal/myoepithelial layers in a unique reiterative pattern, whereas single or paired L cells appear among ductal and alveolar cells. Long-term lineage tracing and functional studies indicate that S and L cells regulate ipsi- and contralateral spatial placement of tertiary branches and formation of alveolar clusters. Our findings revise present models of mammary epithelial cell hierarchy, reveal a hitherto undescribed mechanism regulating branching morphogenesis and may have important implications for identification of the cell-of-origin of distinct breast cancer subtypes.