AP-1 (activator protein 1) activity is strongly induced in response to numerous signals, including growth factors, cytokines and extracellular stresses. The proto-oncoprotein c-Jun belongs to the AP-1 group of transcription factors and it is a crucial regulator of intestinal progenitor proliferation and tumorigenesis. An important mechanism of AP-1 stimulation is phosphorylation of c-Jun by the Jun amino-terminal kinases (JNKs). N-terminal phosphorylation of the c-Jun transactivation domain increases target gene transcription, but a molecular explanation was elusive. Here we show that unphosphorylated, but not N-terminally phosphorylated c-Jun, interacts with Mbd3 and thereby recruits the nucleosome remodelling and histone deacetylation (NuRD) repressor complex. Mbd3 depletion in colon cancer cells increased histone acetylation at AP-1-dependent promoters, which resulted in increased target gene expression. The intestinal stem cell marker lgr5 was identified as a novel target gene controlled by c-Jun/Mbd3. Gut-specific conditional deletion of mbd3 (mbd3(ΔG/ΔG) mice) stimulated c-Jun activity and increased progenitor cell proliferation. In response to inflammation, mdb3 deficiency resulted in colonic hyperproliferation and mbd3(ΔG/ΔG) mice showed markedly increased susceptibility to colitis-induced tumorigenesis. Notably, concomitant inactivation of a single allele of c-jun reverted physiological and pathological hyperproliferation, as well as the increased tumorigenesis in mbd3(ΔG/ΔG) mice. Thus the transactivation domain of c-Jun recruits Mbd3/NuRD to AP-1 target genes to mediate gene repression, and this repression is relieved by JNK-mediated c-Jun N-terminal phosphorylation.