Mounting evidence suggests that long noncoding RNAs (lncRNAs) can function as microRNA sponges and compete for microRNA binding to protein-coding transcripts. However, the prevalence, functional significance and targets of lncRNA-mediated sponge regulation of cancer are mostly unknown. Here we identify a lncRNA-mediated sponge regulatory network that affects the expression of many protein-coding prostate cancer driver genes, by integrating analysis of sequence features and gene expression profiles of both lncRNAs and protein-coding genes in tumours. We confirm the tumour-suppressive function of two lncRNAs (TUG1 and CTB-89H12.4) and their regulation of PTEN expression in prostate cancer. Surprisingly, one of the two lncRNAs, TUG1, was previously known for its function in polycomb repressive complex 2 (PRC2)-mediated transcriptional regulation, suggesting its sub-cellular localization-dependent function. Our findings not only suggest an important role of lncRNA-mediated sponge regulation in cancer, but also underscore the critical influence of cytoplasmic localization on the efficacy of a sponge lncRNA.