During embryonic development presumptive hair follicle cells of epithelial and mesenchymal origin are determined in defined body locations. This is followed by rapid proliferation of epithelial cells and associated penetration into the dermis in response to as yet undetermined signals. A collagen matrix culture system, which maintains the three-dimensional relationships of hair follicle cells to each other, was developed to study the regulation of the enlargement of immature hair follicles and the accompanying remodeling of the dermis. In studies with a heterogeneous dermis-derived preparation of murine hair follicles, ranging in size from the earliest down-growing budding cell mass to hair-forming follicles, we had previously shown that cell proliferation was stimulated by cholera toxin and epidermal growth factor, but only the epidermal growth factor-stimulated proliferation was accompanied by digestion of the collagen matrix due to release of collagenolytic enzymes. Further studies revealed that transforming growth factor-alpha also stimulated hair follicle cell proliferation and collagenase release. However, although transforming growth factor-beta inhibited the transforming growth factor-alpha-stimulated proliferation, it enhanced the release and activation of collagenases and other gelatin-degrading enzymes detectable by gelatin zymography. Stimulation of collagenolytic activity depended on the three-dimensional hair follicle structure and did not occur in monolayer cultures of hair follicle cells. Comparison of hair follicle buds with more developed dermis-derived hair follicles, plated at the same cell density (based on DNA content), suggested that a greater fraction of cells in the bud-stage follicle responded to the growth factors by release of collagenases. Possibly only the cells in the advancing portion of growing hair follicles that are closest to the dermal papilla cell cluster produce the collagenases in response to growth factors. To examine the participation of dermal papilla cells in collagenase release and activation, several immortalized rat whisker dermal papilla cell lines were co-cultured with mouse hair follicle buds. Co-culture resulted in a marked enlargement of follicles as well as activation of the 92-kDa type IV collagenase, produced by hair follicle buds, that correlated with ability of the dermal papilla cells to stimulate hair formation in grafts of hair follicle buds on nude mice. Dermal papilla cells cultured alone produced the 72-kDa type IV collagenase, which was also activated during co-culture with hair follicle buds. Thus, two activities, both relevant for hair follicle development, namely, cell proliferation and release and activation of collagenases, have been stimulated in immature hair follicle buds by either growth-factor supplementation or interaction with dermal papilla cells.(ABSTRACT TRUNCATED AT 400 WORDS)