Haematopoietic stem cells (HSCs) must achieve a balance between quiescence and activation that fulfils immediate demands for haematopoiesis without compromising long-term stem cell maintenance, yet little is known about the molecular events governing this balance. Phosphatase and tensin homologue (PTEN) functions as a negative regulator of the phosphatidylinositol-3-OH kinase (PI(3)K)-Akt pathway, which has crucial roles in cell proliferation, survival, differentiation and migration. Here we show that inactivation of PTEN in bone marrow HSCs causes their short-term expansion, but long-term decline, primarily owing to an enhanced level of HSC activation. PTEN-deficient HSCs engraft normally in recipient mice, but have an impaired ability to sustain haematopoietic reconstitution, reflecting the dysregulation of their cell cycle and decreased retention in the bone marrow niche. Mice with PTEN-mutant bone marrow also have an increased representation of myeloid and T-lymphoid lineages and develop myeloproliferative disorder (MPD). Notably, the cell populations that expand in PTEN mutants match those that become dominant in the acute myeloid/lymphoid leukaemia that develops in the later stages of MPD. Thus, PTEN has essential roles in restricting the activation of HSCs, in lineage fate determination, and in the prevention of leukaemogenesis.