TAZ is a WW domain containing a transcription coactivator that modulates mesenchymal differentiation and development of multiple organs. In this study, we show that TAZ is phosphorylated by the Lats tumor suppressor kinase, a key component of the Hippo pathway, whose alterations result in organ and tissue hypertrophy in Drosophila and contribute to tumorigenesis in humans. Lats phosphorylates TAZ on several serine residues in the conserved HXRXXS motif and creates 14-3-3 binding sites, leading to cytoplasmic retention and functional inactivation of TAZ. Ectopic expression of TAZ stimulates cell proliferation, reduces cell contact inhibition, and promotes epithelial-mesenchymal transition (EMT). Elimination of the Lats phosphorylation sites results in a constitutively active TAZ, enhancing the activity of TAZ in promoting cell proliferation and EMT. Our results elucidate a molecular mechanism for TAZ regulation and indicate a potential function of TAZ as an important target of the Hippo pathway in regulating cell proliferation tumorigenesis.