The PI 3-phosphatase PTEN (phosphatase and tensin homologue deleted on chromosome 10), one of the most important tumor suppressors, must associate with the plasma membrane to maintain appropriate steady-state levels of phosphatidylinositol 3,4,5-triphosphate. Yet the mechanism of membrane binding has received little attention and the key determinants that regulate localization, a phosphatidylinositol 4,5-bisphosphate (PIP(2)) binding motif and a cluster of phosphorylated C-terminal residues, were not included in the crystal structure. We report that membrane binding requires PIP(2) and show that phosphorylation regulates an intramolecular interaction. A truncated version of the enzyme, PTEN(1-351), bound strongly to the membrane, an effect that was reversed by co-expression of the remainder of the molecule, PTEN(352-403). The separate fragments associated in vitro, an interaction dependent on phosphorylation of the C-terminal cluster, a portion of the PIP(2) binding motif, integrity of the phosphatase domain, and the CBR3 loop. Our investigation provides direct evidence for a model in which PTEN switches between open and closed states and phosphorylation favors the closed conformation, thereby regulating localization and function. Small molecules targeting these interactions could potentially serve as therapeutic agents in antagonizing Ras or PI3K-driven tumors. The study also stresses the importance of determining the structure of the native enzyme.