Cancer stem cells (CSCs) play critical roles in cancer initiation, metastasis, recurrence, and drug resistance. Recent studies have revealed involvement of cancer‐associated fibroblasts (CAFs) in regulating CSCs. However, the intracellular molecular mechanisms that determine the regulatory role of CAFs in modulating the plasticity of CSCs remain unknown. Here, we uncovered that intracellular Notch1 signaling in CAFs serves as a molecular switch, which modulates tumor heterogeneity and aggressiveness by inversely controlling stromal regulation of the plasticity and stemness of CSCs. Using mesenchymal stem cell‐derived fibroblasts (MSC‐DF) harboring reciprocal loss‐of‐function and gain‐of‐function Notch1 signaling, we found that MSC‐DFNotch1−/− prompted cocultured melanoma cells to form more spheroids and acquire the phenotype (CD271+ and Nestin+) of melanoma stem/initiating cells (MICs), whereas MSC‐DFN1IC+/+ suppressed melanoma cell sphere formation and mitigated properties of MICs. MSC‐DFNotch1−/− increased stemness of CD271+ MIC, which resultantly exhibited stronger aggressiveness in vitro and in vivo, by upregulating Sox2/Oct4/Nanog expression. Consistently, when cografted with melanoma cells into NOD scid gamma (NSG) mice, MSC‐DFNotch1−/− increased, but MSC‐DFN1IC+/+ decreased, the amounts of CD271+ MIC in melanoma tissue. The amounts of CD271+ MIC regulated by MSC‐DF carrying high or low Notch1 pathway activity is well correlated with capability of melanoma metastasis, supporting that melanoma metastasis is MIC‐mediated. Our data demonstrate that intracellular Notch1 signaling in CAFs is a molecular switch dictating the plasticity and stemness of MICs, thereby regulating melanoma aggressiveness, and therefore that targeting the intracellular Notch1 signaling pathway in CAFs may present a new therapeutic strategy for melanoma. Stem Cells 2019;37:865–875