Src family protein-tyrosine kinases, which play an important role in signal integration, have been implicated in tumorigenesis in multiple lineages, including breast cancer. We demonstrate, herein, that Src kinases regulate the phosphatidylinositol 3-kinase (PI3K) signaling cascade via altering the function of the PTEN tumor suppressor. Overexpression of activated Src protein-tyrosine kinases in PTEN-deficient breast cancer cells does not alter AKT phosphorylation, an indicator of signal transduction through the PI3K pathway. However, in the presence of functional PTEN, Src reverses the activity of PTEN, resulting in an increase in AKT phosphorylation. Activated Src reduces the ability of PTEN to dephosphorylate phosphatidylinositols in micelles and promotes AKT translocation to cellular plasma membranes but does not alter PTEN activity toward water-soluble phosphatidylinositols. Thus, Src may alter the capacity of the PTEN C2 domain to bind cellular membranes rather than directly interfering with PTEN enzymatic activity. Tyrosine phosphorylation of PTEN is increased in breast cancer cells treated with pervanadate, suggesting that PTEN contains sites for tyrosine phosphorylation. Src kinase inhibitors markedly decreased pervanadate-mediated tyrosine phosphorylation of PTEN. Further, expression of activated Src results in marked tyrosine phosphorylation of PTEN. SHP-1, a SH2 domain-containing protein-tyrosine phosphatase, selectively binds and dephosphorylates PTEN in Src transfected cells. Both Src inhibitors and SHP-1 overexpression reverse Src-induced loss of PTEN function. Coexpression of PTEN with activated Src reduces the stability of PTEN. Taken together, the data indicate that activated Src inhibits PTEN function leading to alterations in signaling through the PI3K/AKT pathway.