Since their discovery, protein tyrosine phosphatases have been speculated to play a role in tumor suppression because of their ability to antagonize the growth-promoting protein tyrosine kinases. Recently, a tumor suppressor from human chromosome 10q23, called PTEN or MMAC1, has been identified that shares homology with the protein tyrosine phosphatase family. Germ-line mutations in PTEN give rise to several related neoplastic disorders, including Cowden disease. A key step in understanding the function of PTEN as a tumor suppressor is to identify its physiological substrates. Here we report that a missense mutation in PTEN, PTEN-G129E, which is observed in two Cowden disease kindreds, specifically ablates the ability of PTEN to recognize inositol phospholipids as a substrate, suggesting that loss of the lipid phosphatase activity is responsible for the etiology of the disease. Furthermore, expression of wild-type or substrate-trapping forms of PTEN in HEK293 cells altered the levels of the phospholipid products of phosphatidylinositol 3-kinase and ectopic expression of the phosphatase in PTEN-deficient tumor cell lines resulted in the inhibition of protein kinase (PK) B/Akt and regulation of cell survival.