Tight junctions (TJs) regulate epithelial cell polarity and paracellular permeability. Loss of functional TJs is commonly associated with epithelial cell-derived cancers. Raf1-mediated transformation of rat salivary gland epithelial cells (Pa4-Raf1) induces transcriptional downregulation of the TJ protein occludin and forced re-expression of occludin rescues polarized phenotype of epithelial cells. In the present study, we used this model to examine how specific structural modifications in the occludin protein affect its function in vitro and influence tumor growth in vivo. Our results revealed that neither the C-terminal nor the N-terminal half of occludin alone were sufficient to rescue cells from transformation by Raf1. However, forced expression of an occludin mutant lacking the first extracellular loop was sufficient to rescue cells from Raf1-mediated transformation. Interestingly, forced expression of an occludin mutant lacking the second extracellular loop did not rescue the epithelial phenotype in vitro nor did it prevent tumor growth in vivo. These results demonstrate that the TJ protein occludin has a potent inhibitory effect on the Raf1-mediated tumorigenesis, and the second extracellular loop of occludin appears to be critical for this function.