Corneal epithelial stem cells are thought to reside in the limbus, the transition zoon between cornea and conjunctiva. Keratinocyte growth factor (KGF) and hepatocyte growth factor (HGF) are two paracrine factors that regulate the proliferation, migration and differentiation of the limbal epithelial cells; however, the underlying mechanisms are still poorly understood. In an ex vivo limbal explant culture, we found that KGF is a more potent growth stimulator for the epithelial outgrowth than HGF. Immunofluorescence studies of the epithelial outgrowth from cells treated with HGF or KGF showed similar expression patterns of keratin-3 and keratin-14. Interestingly, p63 was highly expressed in KGF-treated limbal epithelial sheets but not in those treated with HGF. Kinase inhibitor studies showed that induction of ΔNp63α expression by KGF is mediated via the p38 pathway. The effect of KGF on limbal epithelial outgrowth was significantly reduced when endogenous ΔNp63α was suppressed, suggesting that KGF-induced limbal epithelial outgrowth is dependent on the expression of ΔNp63α. Our findings strongly suggest that limbal keratocytes regulate limbal epithelial cell growth and differentiation through a KGF paracrine loop, with ΔNp63α expression as one of the downstream targets.