The molecular basis for contact inhibition of cell locomotion is still largely unknown. Cadherins, the major receptors mediating cell-cell adhesion, associate in the cytoplasm with armadillo family proteins, including beta- and gamma-catenin and p120 catenin (p120ctn). E-cadherin-mediated contact formation was shown to inhibit cellular motility. We examine whether p120ctn may have a role in this regulation. We show here that overexpression of p120ctn in fibroblasts and epithelial cells induces pronounced changes in cell shape, motility and adhesion to the extracellular matrix. p120ctn-transfected cells display increased filopodial/lamellipodial activity, decreased contractility and focal adhesion formation, and augmented migratory ability. These effects of p120ctn are mediated by small GTPases of the Rho family. Direct assessment of the activity of these GTPases in cells expressing a 5-fold higher level of p120ctn as compared to non-transfected control cells revealed significant augmentation of Cdc42 and Rac activity. Moreover, co-transfection of p120ctn with dominant-negative Cdc42 and Rac, or constitutively active Rho suppressed morphological effects of p120ctn. Confocal immunofluorescence visualization of the distribution of endogenous p120ctn in dense cultures showed that formation of cadherin-mediated cell-cell contacts is accompanied by sequestering of p120ctn to the junction regions. In sparse cultures p120ctn is distributed over the cytoplasm. Co-transfection with an excess of E-cadherin leads to sequestration of exogenous p120ctn to cell-cell junctions or to small cadherin-containing vesicles, and abolishes p120ctn effects on cell morphology. Thus, p120ctn may couple the formation and disruption of cadherin-mediated contacts with regulation of cell motility by triggering pathway(s) affecting Rho family GTPases.