PTEN is a tumour suppressor frequently mutated in many types of cancers. Here we show that targeted disruption of PTEN leads to neoplastic transformation of human neural stem cells (NSCs), but not mesenchymal stem cells. PTEN-deficient NSCs display neoplasm-associated metabolic and gene expression profiles and generate intracranial tumours in immunodeficient mice. PTEN is localized to the nucleus in NSCs, binds to the PAX7 promoter through association with cAMP responsive element binding protein 1 (CREB)/CREB binding protein (CBP) and inhibits PAX7 transcription. PTEN deficiency leads to the upregulation of PAX7, which in turn promotes oncogenic transformation of NSCs and instates 'aggressiveness' in human glioblastoma stem cells. In a large clinical database, we find increased PAX7 levels in PTEN-deficient glioblastoma. Furthermore, we identify that mitomycin C selectively triggers apoptosis in NSCs with PTEN deficiency. Together, we uncover a potential mechanism of how PTEN safeguards NSCs, and establish a cellular platform to identify factors involved in NSC transformation, potentially permitting personalized treatment of glioblastoma.