Tumor suppressor PTEN (phosphatase and tensin homologue deleted on chromosome 10) levels are frequently found reduced in human cancers, but how PTEN is down-regulated is not fully understood. In addition, although a compelling connection exists between PRL (phosphatase of regenerating liver) 2 and cancer, how this phosphatase induces oncogenesis has been an enigma. Here, we discovered that PRL2 ablation inhibits PTEN heterozygosity-induced tumorigenesis. PRL2 deficiency elevates PTEN and attenuates AKT signaling, leading to decreased proliferation and increased apoptosis in tumors. We also found that high PRL2 expression is correlated with low PTEN level with reduced overall patient survival. Mechanistically, we identified PTEN as a putative PRL2 substrate and demonstrated that PRL2 down-regulates PTEN by dephosphorylating PTEN at Y336, thereby augmenting NEDD4-mediated PTEN ubiquitination and proteasomal degradation. Given the strong cancer susceptibility to subtle reductions in PTEN, the ability of PRL2 to down-regulate PTEN provides a biochemical basis for its oncogenic propensity. The results also suggest that pharmacological targeting of PRL2 could provide a novel therapeutic strategy to restore PTEN, thereby obliterating PTEN deficiency-induced malignancies.