Cyclin E is often overexpressed in cancer tissue, leading to genetic instability and aneuploidy. Cullin 3 (Cul3) is a component of the BTB-Cul3-Rbx1 (BCR) ubiquitin ligase that is involved in the turnover of cyclin E. Here we show that liver-specific ablation of Cul3 in mice results in the persistence and massive expansion of hepatic progenitor cells. Upon induction of differentiation, Cul3-deficient progenitor cells underwent substantial DNA damage in vivo and in vitro, thereby triggering the activation of a cellular senescence response that selectively blocked the expansion of the differentiated offspring. Positive selection of undifferentiated progenitor cells required the expression of the tumor suppressor protein p53. Simultaneous loss of Cul3 and p53 in hepatic progenitors turned these cells into highly malignant tumor-initiating cells that formed largely undifferentiated tumors in nude mice. In addition, loss of Cul3 and p53 led to the formation of primary hepatocellular carcinomas. Importantly, loss of Cul3 expression was also detected in a large series of human liver cancers and correlated directly with tumor de-differentiation. The expression of Cul3 during hepatic differentiation therefore safeguards against the formation of progenitor cells that carry a great potential for transformation into tumor-initiating cells.