PTEN dysfunction plays a crucial role in the pathogenesis of hereditary and sporadic cancers. Here we show that PTEN homo-dimerizes, and in this active conformation exerts lipid phosphatase activity on PtdIns(3,4,5)P3. We demonstrate that catalytically inactive cancer-associated PTEN mutants hetero-dimerize with wild-type PTEN and constrain its phosphatase activity in a dominant-negative manner. To study the consequences of homo- and hetero-dimerization of wild-type and mutant PTEN in vivo, we generated Pten knock-in mice harboring two cancer-associated PTEN mutations (PtenC124S and PtenG129E). Heterozygous PtenC124S/+ and PtenG129E/+ cells and tissues exhibit increased sensitivity to PI3-K/Akt activation compared to wild-type and Pten+/- counterparts, while this difference is no longer apparent between PtenC124S/- and Pten-/- cells. Notably, PtenKI mice are more tumor-prone and display features reminiscent of complete Pten loss. Our findings reveal that PTEN loss and PTEN mutations are not synonymous, and define a new working model for the function and regulation of PTEN.