The prostate contains two major epithelial cell types - luminal and basal cells - both of which develop from urogenital sinus epithelium. The cell linage relationship between these two epithelial types is not clear. Here we demonstrate that luminal cells can develop independently of basal cells, but that basal cells are essential for maintaining ductal integrity and the proper differentiation of luminal cells. Urogenital sinus (UGS) isolated from p63(+/+) and p63(-/-) embryos developed into prostate when grafted into adult male nude mice. Prostatic tissue that developed in p63(-/-) UGS grafts contained neuroendocrine and luminal cells, but basal cells were absent. Therefore, p63 is essential for differentiation of basal cells, but p63 and thus basal cells are not required for differentiation of prostatic neuroendocrine and luminal epithelial cells. p63(-/-) prostatic grafts also contained atypical mucinous cells, which appeared to differentiate from luminal cells via activation of Src. In the response to castration, regression of p63(-/-) prostate was inordinately severe with almost complete loss of ducts, resulting in the formation of residual cystic structures devoid of epithelium. Therefore, basal cells play critical roles in maintaining ductal integrity and survival of luminal cells. However, regressed p63(-/-) prostate did regenerate in response to androgen administration, indicating that basal cells were not essential for prostatic regeneration.