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.