In vitro, the tumour suppressor PTEN (phosphatase and tensin homologue deleted on chromosome 10) displays intrinsic phosphatase activity towards both protein and lipid substrates. In vivo, the lipid phosphatase activity of PTEN, through which it dephosphorylates the 3 position in the inositol sugar of phosphatidylinositol derivatives, is important for its tumour suppressor function; however, the significance of its protein phosphatase activity remains unclear. Using two-photon laser-scanning microscopy and biolistic gene delivery of GFP (green fluorescent protein)-tagged constructs into organotypic hippocampal slice cultures, we have developed an assay of PTEN function in living tissue. Using this bioassay, we have demonstrated that overexpression of wild-type PTEN led to a decrease in spine density in neurons. Furthermore, it was the protein phosphatase activity, but not the lipid phosphatase activity, of PTEN that was essential for this effect. The ability of PTEN to decrease neuronal spine density depended upon the phosphorylation status of serine and threonine residues in its C-terminal segment and the integrity of the C-terminal PDZ-binding motif. The present study reveals a new aspect of the function of this important tumour suppressor and suggest that, in addition to dephosphorylating the 3 position in phosphatidylinositol phospholipids, the critical protein substrate of PTEN may be PTEN itself.