Vascular disease progression is associated with marked changes in vascular smooth muscle cell (SMC) phenotype and function. SMC contractile gene expression and, thus differentiation, is under direct transcriptional control by the transcription factor, serum response factor (SRF); however, the mechanisms dynamically regulating SMC phenotype are not fully defined. Here we report that the lipid and protein phosphatase, PTEN, has a novel role in the nucleus by functioning as an indispensible regulator with SRF to maintain the differentiated SM phenotype. PTEN interacts with the N-terminal domain of SRF and PTEN-SRF interaction promotes SRF binding to essential promoter elements in SM-specific genes. Factors inducing phenotypic switching promote loss of nuclear PTEN through nucleo-cytoplasmic translocation resulting in reduced myogenically active SRF, but enhanced SRF activity on target genes involved in proliferation. Overall decreased expression of PTEN was observed in intimal SMCs of human atherosclerotic lesions underlying the potential clinical importance of these findings.