PTEN is proposed to function at the plasma membrane, where receptor tyrosine kinases are activated. However, the majority of PTEN is located throughout the cytoplasm. Here, we show that cytoplasmic PTEN is distributed along microtubules, tethered to vesicles via phosphatidylinositol 3-phosphate (PI(3)P), the signature lipid of endosomes. We demonstrate that the non-catalytic C2 domain of PTEN specifically binds PI(3)P through the CBR3 loop. Mutations render this loop incapable of PI(3)P binding and abrogate PTEN-mediated inhibition of PI 3-kinase/AKT signaling. This loss of function is rescued by fusion of the loop mutant PTEN to FYVE, the canonical PI(3)P binding domain, demonstrating the functional importance of targeting PTEN to endosomal membranes. Beyond revealing an upstream activation mechanism of PTEN, our data introduce the concept of PI 3-kinase signal activation on the vast plasma membrane that is contrasted by PTEN-mediated signal termination on the small, discrete surfaces of internalized vesicles.