Cdc42 is a Rho-family GTPase that in yeast is important in establishing polarized bud growth. Here we show that Cdc42 is also essential in establishing and maintaining polarity in epithelial cells. Functional deletion of Cdc42 in Madin-Darby canine kidney (MDCK) cells results in the selective depolarization of basolateral membrane proteins; the polarity of apical proteins remains unaffected. This phenotype does not reflect major alterations in the actin cytoskeleton, but rather results from the selective inhibition of membrane traffic to the basolateral plasma membrane in both the endocytic and the secretory pathways. Thus, Cdc42 plays a critical part in epithelial-cell polarity, by, unexpectedly, regulating the fidelity of membrane transport.