The PTEN gene encodes a dual-specificity phosphatase mutated in a variety of human cancers. PTEN germline mutations are found in three related human autosomal dominant disorders, Cowden disease (CD), Lhermitte-Duclos disease (LDD) and Bannayan-Zonana syndrome (BZS), characterized by tumour susceptibility and developmental defects. To examine the role of PTEN in ontogenesis and tumour suppression, we disrupted mouse Pten by homologous recombination. Pten inactivation resulted in early embryonic lethality. Pten-/- ES cells formed aberrant embryoid bodies and displayed an altered ability to differentiate into endodermal, ectodermal and mesodermal derivatives. Pten+/- mice and chimaeric mice derived from Pten+/- ES cells showed hyperplastic-dysplastic changes in the prostate, skin and colon, which are characteristic of CD, LDD and BZS. They also spontaneously developed germ cell, gonadostromal, thyroid and colon tumours. In addition, Pten inactivation enhanced the ability of ES cells to generate tumours in nude and syngeneic mice, due to increased anchorage-independent growth and aberrant differentiation. These results support the notion that PTEN haploinsufficiency plays a causal role in CD, LDD and BZS pathogenesis, and demonstrate that Pten is a tumour suppressor essential for embryonic development.