Current models predict that beta-catenin (beta-cat) functions in Wnt signaling via activation of Tcf/Lef target genes and that its abundance is regulated by the adenomatous polyposis coli (APC) and glycogen synthase kinase 3beta (GSK3beta) proteins. In colon and other cancers, mutations in APC or presumptive GSK3beta phosphorylation sites of beta-cat are associated with constitutive activation of Tcf/Lef transcription. In spite of assumptions about its oncogenic potential, prior efforts to demonstrate that mutated beta-cat will induce neoplastic transformation have yielded equivocal results. We report here that mutated, but not wild-type, beta-cat proteins induced neoplastic transformation of RK3E, an adenovirus E1A-immortalized epithelial cell line. Analysis of the properties of mutant beta-cat proteins and studies with a dominant negative Tcf-4 mutant indicated that the ability of beta-cat to bind and activate Tcf/Lef factors is crucial for transformation. c-myc has recently been implicated as a critical Tcf-regulated target gene. However, c-myc was not consistently activated in beta-cat-transformed RK3E cells, and a dominant negative c-Myc mutant protein failed to inhibit beta-cat transformation. Our findings underscore the role of beta-cat mutations and Tcf/Lef activation in cancer and illustrate a useful system for defining critical factors in beta-cat transformation.