beta-Catenin is a key molecule involved in both cell adhesion and Wnt signaling pathway. However, the exact relationship between these two roles has not been clearly elucidated. Tyrosine phosphorylation of beta-catenin was shown to decrease its binding to E-cadherin, leading to decreased cell adhesion and increased beta-catenin signaling. We have previously shown that receptor-like protein-tyrosine phosphatase PCP-2 localizes to the adherens junctions and directly binds and dephosphorylates beta-catenin, suggesting that PCP-2 might regulate the balance between signaling and adhesive beta-catenin. Here we demonstrate that PCP-2 can inhibit both the wild-type and constitutively active forms of beta-catenin in activating target genes such as c-myc. The phosphatase activity of PCP-2 is required for this effect since loss of catalytic activity attenuates its inhibitory effect on beta-catenin activation. Expression of PCP-2 in SW480 colon cancer cells can lead to stabilization of cytosolic pools of beta-catenin perhaps, by virtue of their physical interaction. PCP-2 expression also leads to increased membrane-bound E-cadherin and greater stabilization of adherens junctions by dephosphorylation of beta-catenin, which could further sequester cytosolic beta-catenin and thus inhibit beta-catenin mediated nuclear signaling. Furthermore, SW480 cells stably expressing PCP-2 have a reduced ability to proliferate and migrate. Thus, PCP-2 may play an important role in the maintenance of epithelial integrity, and a loss of its regulatory function may be an alternative mechanism for activating beta-catenin signaling.