An important step in carcinoma progression is loss of cell-cell adhesion leading to increased invasion and metastasis. We show here that the protein tyrosine phosphatase, PTP-PEST, is a critical regulator of cell-cell junction integrity and epithelial cell motility. Using colon carcinoma cells, we show that the expression level of PTP-PEST regulates cell motility. Either transient small interfering RNA or stable short hairpin RNA knockdown of PTP-PEST enhances haptotactic and chemotactic migration of KM12C colon carcinoma cells. Furthermore, KM12C cells with stably knocked down PTP-PEST exhibit a mesenchymal-like phenotype with prominent membrane ruffles and lamellae. In contrast, ectopic expression of PTP-PEST in KM20 or DLD-1 cells, which lack detectable endogenous PTP-PEST expression, suppresses haptotactic migration. Importantly, we find that PTP-PEST localizes in adherens junctions. Concomitant with enhanced motility, stable knockdown of PTP-PEST causes a disruption of cell-cell junctions. These effects are due to a defect in junctional assembly and not to a loss of E-cadherin expression. Adherens junction assembly is impaired following calcium switch in KM12C cells with stably knocked down PTP-PEST and is accompanied by an increase in the activity of Rac1 and a suppression of RhoA activity in response to cadherin engagement. Taken together, these results suggest that PTP-PEST functions as a suppressor of epithelial cell motility by controlling Rho GTPase activity and the assembly of adherens junctions.