Epigenetic mechanisms regulating lineage differentiation of mammary stem cells (MaSCs) remain poorly understood. Pygopus 2 (Pygo2) is a histone methylation reader and a context-dependent Wnt/β-catenin coactivator. Here we provide evidence for Pygo2’s function in suppressing luminal/alveolar differentiation of MaSC-enriched basal cells. We show that Pygo2-deficient MaSC/basal cells exhibit partial molecular resemblance to luminal cells, such as elevated Notch signaling and reduced mammary repopulating capability upon transplantation. Inhibition of Notch signaling suppresses basal-level and Pygo2-deficiency-induced luminal/alveolar differentiation of MaSC/basal cells, whereas activation of Wnt/β-catenin signaling suppresses luminal/alveolar differentiation and Notch3 expression in a Pygo2-dependent manner. We show that Notch3 is a direct target of Pygo2 and that Pygo2 is required for β-catenin binding and maintenance of a poised/repressed chromatin state at the Notch3 locus in MaSC/basal cells. Together, our data support a model where Pygo2-mediated chromatin regulation connects Wnt signaling and Notch signaling to restrict the luminal/alveolar differentiation competence of MaSC/basal cells.