The PTEN protein has a single catalytic domain possessing both lipid phosphoinositol and protein phosphatase activities. The lipid phosphoinositol phosphatase activity is essential for PTEN to block the cell cycle in the G1 phase and thereby to suppress tumor formation and progression (Cantley, L. C., and Neel, B. G. (1999) Proc. Natl. Acad. Sci. U. S. A. 96, 4240-4245), although the mechanisms governing PTEN activity under normal and neoplastic growth conditions remain unclear. Here, we report that PTEN interacts physically and functionally with PCAF, a histone acetyltransferase that regulates gene transcription through interaction with p300/CBP and various sequence-specific transcription factors (Nakatani, Y. (2001) Genes Cells 6, 79-86). Expression of PCAF results in increased acetylation of lysine residues (Lys125 and Lys128) within the catalytic cleft of PTEN, a structure essential for phosphatidylinositol 3,4,5-trisphosphate specificity (Lee, J. O., Yang, H., Georgescu, M. M., Di Cristofano, A., Maehama, T., Shi, Y., Dixon, J. E., Pandolfi, P., and Pavletich, N. P. (1999) Cell 99, 323-334). The acetylation of PTEN caused by PCAF expression depends on the presence of growth factors. Reduction of endogenous PCAF activity using shRNA results in a loss of PTEN acetylation in response to growth factors and restores the ability of PTEN to down-regulate phosphatidylinositol 3-kinase signaling and to induce G1 cell cycle arrest. The retention of phosphatidylinositol 3-kinase/AKT signaling and cell cycle regulatory activities of acetylation-resistant PTEN K125R and K128R mutants in the presence of enforced PCAF expression suggest a causal relationship. Together, these findings indicate a mechanism of PTEN regulation that forges a link between distinct cancer-relevant pathways central to the control of growth factor signaling and gene expression.