Tissue development/remodeling requires modulations in both cellular architecture and phenotype. Aberration in these processes leads to tumorigenesis. During the pregnancy/lactation cycle the mammary epithelial cells undergo complex morphological and phenotypic programs resulting in the acquisition of apical/basal (A/B) polarization and cellular maturation necessary for proper lactation. Still the hormonal regulations and cellular mechanisms controlling these events are not entirely elucidated. Here we show that prolactin (PRL)/Jak2 pathway in mammary epithelial cells uniquely signals to establish A/B polarity as determined by the apical localization of the tight junction protein zona occludens 1 (ZO-1) and the basal/lateral localization of E-cadherin, and the apical trafficking of lipid droplets. As well, our results indicate that this pathway regulates mammary stem cell hierarchy by inducing the differentiation of luminal progenitor (EpCAMhi/CD49fhi) cells to mature luminal (EpCAMhi/CD49flow) cells. Moreover, our data indicate that PRL/Jak2 coordinates both of these cellular events through limiting the mitogen activated protein kinase (Erk1/2) pathway. Together our findings define a novel unifying mechanism coupling mammary epithelial cell A/B polarization and terminal differentiation.