Human lung cancers, including squamous cell carcinoma (SCC) are a leading cause of death and, whilst evidence suggests that basal stem cells drive SCC initiation and progression, the mechanisms regulating these processes remain unknown. In this study we show that β‐catenin signalling regulates basal progenitor cell fate and subsequent SCC progression. In a cohort of preinvasive SCCs we established that elevated basal cell β‐catenin signalling is positively associated with increased disease severity, epithelial proliferation and reduced intercellular adhesiveness. We demonstrate that transgene‐mediated β‐catenin inhibition within keratin 14‐expressing basal cells delayed normal airway repair while basal cell‐specific β‐catenin activation increased cell proliferation, directed differentiation and promoted elements of early epithelial‐mesenchymal transition (EMT), including increased Snail transcription and reduced E‐cadherin expression. These observations are recapitulated in normal human bronchial epithelial cells in vitro following both pharmacological β‐catenin activation and E‐cadherin inhibition, and mirrored our findings in preinvasive SCCs. Overall, the data show that airway basal cell β‐catenin determines cell fate and its mis‐expression is associated with the development of human lung cancer. Copyright © 2012 Pathological Society of Great Britain and Ireland. Published by John Wiley & Sons, Ltd.