To investigate the molecular basis of PTEN-mediated tumor suppression, we introduced a null mutation into the mouse Pten gene by homologous recombination in embryonic stem (ES) cells. Pten^−/− ES cells exhibited an increased growth rate and proliferated even in the absence of serum. ES cells lacking PTEN function also displayed advanced entry into S phase. This accelerated G₁/S transition was accompanied by down-regulation of p27^KIP1, a major inhibitor for G₁ cyclin-dependent kinases. Inactivation of PTEN in ES cells and in embryonic fibroblasts resulted in elevated levels of phosphatidylinositol 3,4,5,-trisphosphate, a product of phosphatidylinositol 3 kinase. Consequently, PTEN deficiency led to dosage-dependent increases in phosphorylation and activation of Akt/protein kinase B, a well-characterized target of the phosphatidylinositol 3 kinase signaling pathway. Akt activation increased Bad phosphorylation and promoted Pten^−/− cell survival. Our studies suggest that PTEN regulates the phosphatidylinositol 3,4,5,-trisphosphate and Akt signaling pathway and consequently modulates two critical cellular processes: cell cycle progression and cell survival.