The integrity of cell-cell contacts such as adherens junctions (AJ) and tight junctions (TJ) is essential for the function of epithelia. During carcinogenesis, the increased motility and invasiveness of tumor cells reflect the loss of characteristic epithelial features, including cell adhesion. While beta-catenin, a component of AJ, plays a well characterized dual role in cell adhesion and signal transduction leading to epithelial cell transformation, little is known about possible roles of tight junction components in signaling processes. Here we show that mutants of the TJ protein zonula occludens protein-1 (ZO-1), which encode the PDZ domains (ZO-1 PDZ) but no longer localize at the plasma membrane, induce a dramatic epithelial to mesenchymal transition (EMT) of Madin-Darby canine kidney I (MDCKI) cells. The observed EMT of these MDCK-PDZ cells is characterized by a repression of epithelial marker genes, a restricted differentiation potential and a significantly induced tumorigenicity. Intriguingly, the beta-catenin signaling pathway is activated in the cells expressing the ZO-1 PDZ protein. Ectopic expression of the adenomatous polyposis coli tumor suppressor gene, known to down-regulate activated beta-catenin signaling, reverts the transformed fibroblastoid phenotype of MDCK-PDZ cells. Thus, cytoplasmic localization of the ZO-1 PDZ domains induces an EMT in MDCKI cells, most likely by modulating beta-catenin signaling.