Defects in the function of the skin barrier are associated with a wide variety of skin diseases, many of which are not well characterized at the molecular level. Using Lef1 (lymphoid enhancer-binding factor 1) dominant-negative mutant mice, we demonstrate here that altered epidermal TCF (T cell factor)/Lef1 signaling results in severe impairment of the stratum corneum skin barrier and early postnatal death. Barrier defects were accompanied by major changes in lipid composition and ultrastructural abnormalities in assembly and extrusion of lipid lamellae of the interfollicular epidermis, as well as abnormal processing of profilaggrin. In contrast, tight-junction formation and stratified organization of the interfollicular epidermis was not obviously disturbed in Lef1 mutant mice. Molecular analysis revealed that TCF/Lef1 signaling regulates expression of lipid-modifying enzymes, such as Elovl3 and stearoyl coenzyme A desaturase 1 (SCD1), which are key regulators of barrier function. Promoter analysis and chromatin immunoprecipitation experiments indeed showed that SCD1 is a direct target of Lef1. Together, our data demonstrate that functional TCF/Lef1 signaling governs important aspects of epidermal differentiation and lipid metabolism, thereby regulating skin barrier function.