Indirect evidence suggests that p120-catenin (p120) can both positively and negatively affect cadherin adhesiveness. Here we show that the p120 gene is mutated in SW48 cells, and that the cadherin adhesion system is impaired as a direct consequence of p120 insufficiency. Restoring normal levels of p120 caused a striking reversion from poorly differentiated to cobblestone-like epithelial morphology, indicating a crucial role for p120 in reactivation of E-cadherin function. The rescue efficiency was enhanced by increased levels of p120, and reduced by the presence of the phosphorylation domain, a region previously postulated to confer negative regulation. Surprisingly, the rescue was associated with substantially increased levels of E-cadherin. E-cadherin mRNA levels were unaffected by p120 expression, but E-cadherin half-life was more than doubled. Direct p120-E-cadherin interaction was crucial, as p120 deletion analysis revealed a perfect correlation between E-cadherin binding and rescue of epithelial morphology. Interestingly, the epithelial morphology could also be rescued by forced expression of either WT E-cadherin or a p120-uncoupled mutant. Thus, the effects of uncoupling p120 from E-cadherin can be at least partially overcome by artificially maintaining high levels of cadherin expression. These data reveal a cooperative interaction between p120 and E-cadherin and a novel role for p120 that is likely indispensable in normal cells.