The APC tumor suppressor protein binds to β-catenin, a protein recently shown to interact with Tcf/Lef transcription factors. Here, the gene encoding a Tcf family member that is expressed in colonic epithelium (hTcf-4) was cloned and characterized. hTcf-4 transactivates transcription only when associated with β-catenin. Nuclei of APC-/- colon carcinoma cells were found to contain a stable β-catenin-hTCF-4 complex that was constitutively active, as measured by transcription of a Tcf reporter gene. Reintroduction of APC removed β-catenin from hTcf4 and abrogated the transcriptional transactivation. Constitutive transcription of TCF target genes, caused by loss of APC function, may be a crucial event in the early transformation of colonic epithelium. It is also shown here that the products of mutant APC genes found in colorectal tumors are defective in regulating β-catenin/Tcf-4 transcriptional activation. Furthermore, colorectal tumors with intact APC genes were shown to contain subtle activating mutations of β-catenin that altered functionally significant phosphorylation sites. These results indicate that regulation of β-catenin is critical to APC"s tumor suppressive effect and that this regulation can be circumvented by mutations in either APC or β-catenin.