Inactivating mutations of the adenomatous polyposis coli gene (APC) or activating mutations of the beta-catenin gene (CTNNB1) initiate colorectal neoplasia. To address the biochemical and physiologic effects of mutant beta-catenin, we disrupted either the mutant or wild-type CTNNB1 allele in a human colorectal cancer cell line. Cells with only wild-type beta-catenin had decreased colony-forming ability when plated at low density, although their growth was similar to that of parental cells when passaged under routine conditions. Immunohistochemistry and cell-fractionation studies suggested that mutant beta-catenin activity was distinguished primarily by cellular localization and not by protein degradation. Surprisingly, we found mutant beta-catenin bound less well to E-cadherin than did wild-type beta-catenin, and the membranous localization of wild-type and mutant beta-catenin was accordingly distinct. These findings pose several challenges to current models of APC/beta-catenin function.