Chromosome ends are protected by telomeres that prevent DNA damage response and degradation. Telomerase expression extends telomeres and inhibits DNA damage response. Telomeres are also maintained by the recombination-based alternative lengthening pathway. Telomerase is believed to be the sole mechanism for telomere maintenance in the epidermis. We show that basal cells in the epidermis maintain telomeres both by telomerase and alternative lengthening of telomere (ALT) mechanisms in vivo. ALT was detected in epidermal stem cells in Terc(-/-) mice, and normal human epidermal keratinocytes are also ALT-positive. The ALT pathway is suppressed in primary, but not metastatic, epidermal squamous cell carcinomas (SCC) in Terc(+/+) mice. The ALT pathway is expressed in stem cells and basal cells in epidermal SCC in Terc(-/-) mice, and in some telomerase-positive human SCC lines. Telomeres shorten markedly in stem cells and basal cells in epidermal SCC in vivo. Telomere shortening is associated with telomeric DNA damage response and apoptosis in stem cells and basal cells. Stem cells were transformed in both primary and metastatic epidermal SCC. Genetic ablation of this small cell population resulted in significant tumor regression in vivo. We concluded that alternative lengthening of telomeres is important in epidermal homeostasis and tumorigenesis in vivo.