RhoA organizes actin stress fibres and is necessary for cell transformation by oncogenes such as src and ras. Moreover, RhoA is implicated in cadherin clustering during the formation of adherens junctions. The catenin p120 has also been implicated in cadherin clustering through an unknown mechanism. Here we show that p120 selectively inhibits RhoA activity in vitro and in vivo. RhoA inhibition and the interaction of p120 with cadherins are mutually exclusive, suggesting a mechanism for regulating the recruitment and exchange of RhoA at nascent cell-cell contacts. By affecting RhoA activation, p120 could modulate cadherin functions, including suppression of invasion, neurite extension and junction formation.