The developing ovarian follicle is one of the most rapidly proliferating normal tissues in vivo. Mesenchymal-epithelial cell interactions between theca cells and granulosa cells are essential for this follicular expansion. Ovarian hormones (i.e. estrogen and LH) may promote follicular development by regulating the local production of mesenchymal inducer proteins that mediate theca cell-granulosa cell interactions. Recently, theca cells were shown to produce keratinocyte growth factor (KGF) that can act in a paracrine manner to stimulate granulosa cell growth. In this study, the developmental and hormonal regulation of KGF was examined during follicular development in the bovine ovary. Expression of KGF in theca cells and the KGF receptor (KGFR, or splice variant of the fibroblast growth factor family receptor family, FGFR-2) in granulosa cells was examined using RT-PCR. Both KGF and KGFR were detected throughout follicular development in small (<5 mm), medium (5-10 mm), and large (>10 mm) follicles. Quantitative RT-PCR assays were used to determine steady-state levels of KGF and KGFR messenger RNAs. Developmental regulation of KGF and KGFR was analyzed in freshly isolated theca cells and granulosa cells from small, medium, and large follicles. Observations demonstrated that expression of KGF (in theca cells) and KGFR (in granulosa cells) was highest in large follicles. These results suggest that KGF actions are important for the rapid proliferation of granulosa cells in large follicles. Estrogen and LH are the primary endocrine hormones that regulate theca cell function in vivo. Therefore, hormonal regulation of KGF was analyzed by treating serum-free theca cell cultures with estrogen and human CG (hCG, an LH agonist). Results showed that both estrogen and hCG stimulated KGF gene expression in theca cells. These results suggest that estrogen and LH may promote follicular growth (i.e. granulosa cell proliferation), in part, by stimulating the local production of KGF. Effects of KGF on granulosa cell differentiated functions were examined. Treatment with KGF reduced basal levels and FSH-stimulated levels of aromatase activity in bovine and rat granulosa cells. In addition, KGF inhibited the ability of hCG to stimulate progesterone production by granulosa cells. The inhibition of granulosa cell steroid production by KGF was likely the indirect effect of promoting cellular proliferation. Therefore, KGF directly stimulates granulosa cell proliferation and indirectly inhibits granulosa cell differentiated functions. Combined results suggest that theca cell production of KGF may be important for ovarian folliculogenesis. This is the first report of the regulation of KGF expression in the ovary. The developmental and hormonal regulation of KGF and KGFR during folliculogenesis provides evidence that KGF may be important for hormone-induced granulosa cell proliferation. As a result, KGF may be essential for establishing the microenvironment required for oocyte maturation in the ovary.