Cholangiocellular carcinoma (CC), the second most common primary liver cancer, is associated with a poor prognosis. It has been shown that CCs harbor alterations of a number of tumor-suppressor genes and oncogenes, yet key regulators for tumorigenesis remain unknown. Here we have generated a mouse model that develops CC with high penetrance using liver-specific targeted disruption of tumor suppressors SMAD4 and PTEN. In the absence of SMAD4 and PTEN, hyperplastic foci emerge exclusively from bile ducts of mutant mice at 2 months of age and continue to grow, leading to tumor formation in all animals at 4-7 months of age. We show that CC formation follows a multistep progression of histopathological changes that are associated with significant alterations, including increased levels of phosphorylated AKT, FOXO1, GSK-3beta, mTOR, and ERK and increased nuclear levels of cyclin D1. We further demonstrate that SMAD4 and PTEN regulate each other through a novel feedback mechanism to maintain an expression balance and synergistically repress CC formation. Finally, our analysis of human CC detected PTEN inactivation in a majority of p-AKT-positive CCs, while about half also lost SMAD4 expression. These findings elucidate the relationship between SMAD4 and PTEN and extend our understanding of CC formation.