Progression Elevated Gene-3 (PEG-3) was cloned using subtraction hybridization as an upregulated transcript associated with transformation and tumor progression of rat embryo fibroblast cells. PEG-3 is a unique gene facilitating tumor progression by modulating multiple pathways in transformed cells, including genomic stability, angiogenesis and invasion. PEG-3 originates from mutation in the growth arrest and DNA damage inducible gene GADD34. A one base deletion in rat GADD34 results in a frame-shift and premature appearance of a stop-codon resulting in a C-terminally truncated molecule that is PEG-3. We now document that mutation in the GADD34 gene is a frequent event during transformation and/or immortalization of rodent cells. Sequencing of the GADD34 gene in a number of independent rat tumor cell lines revealed that in a majority of these the GADD34 gene is mutated to either PEG-3 or a PEG-3-like gene with similar C-terminal truncations. An important function of GADD34 is to inhibit cell growth, predominantly by apoptosis, and we demonstrate that PEG-3 or C-terminal truncations of human GADD34 resembling PEG-3 prevent growth inhibition by both human and rat GADD34. Phosphorylation of p53 by GADD34 is one mechanism by which it inhibits growth and PEG-3 could prevent GADD34-induced p53 phosphorylation. In contrast, PEG-3 was unable to block other GADD34-induced changes, including eIF2 alpha dephosphorylation, indicating that its effects on GADD34 may be related more to its effect on cell growth rather than a global inhibitor of all GADD34 functions. We hypothesize that mutational generation of PEG-3 or a similar molecule is a critical event during rodent carcinogenesis. The inherent property of PEG-3 to function as a dominant negative of the growth inhibitory property of GADD34 might rescue cells from DNA damage-induced apoptosis leading to growth independence and tumorigenesis.