PTEN dysfunction plays a crucial role in the pathogenesis of hereditary and sporadic cancers. Here, we show that PTEN homodimerizes and, in this active conformation, exerts lipid phosphatase activity on PtdIns(3,4,5)P3. We demonstrate that catalytically inactive cancer-associated PTEN mutants heterodimerize with wild-type PTEN and constrain its phosphatase activity in a dominant-negative manner. To study the consequences of homo- and heterodimerization of wild-type and mutant PTEN in vivo, we generated Pten knockin mice harboring two cancer-associated PTEN mutations (PtenC124S and PtenG129E). Heterozygous Pten(C124S/+) and Pten(G129E/+) cells and tissues exhibit increased sensitivity to PI3-K/Akt activation compared to wild-type and Pten(+/-) counterparts, whereas this difference is no longer apparent between Pten(C124S/-) and Pten(-/-) cells. Notably, Pten KI 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 working model for the function and regulation of PTEN.