The molecular mechanisms underlying the development of pancreatic neuroendocrine tumors (PanNETs) have not been well defined. We report here that the genomic region of the PHLDA3 gene undergoes loss of heterozygosity (LOH) at a remarkably high frequency in human PanNETs, and this genetic change is correlated with disease progression and poor prognosis. We also show that the PHLDA3 locus undergoes methylation in addition to LOH, suggesting that a two-hit inactivation of the PHLDA3 gene is required for PanNET development. We demonstrate that PHLDA3 represses Akt activity and Akt-regulated biological processes in pancreatic endocrine tissues, and that PHLDA3-deficient mice develop islet hyperplasia. In addition, we show that the tumor-suppressing pathway mediated by MEN1, a well-known tumor suppressor of PanNETs, is dependent on the pathway mediated by PHLDA3, and inactivation of PHLDA3 and MEN1 cooperatively contribute to PanNET development. Collectively, these results indicate the existence of a novel PHLDA3-mediated pathway of tumor suppression that is important in the development of PanNETs.