The tumor suppressor phosphatase and tensin homolog (PTEN) dephosphorylates PIP3 and antagonizes the prosurvival PI3K-Akt pathway. Targeted deletion of PTEN in mice led to early embryonic lethality. To elucidate its role in embryonic epithelial morphogenesis and the underlying mechanisms, we used embryonic stem cell-derived embryoid body (EB), an epithelial cyst structurally similar to the periimplantation embryo. PTEN is upregulated during EB morphogenesis in parallel with apoptosis of core cells, which mediates EB cavitation. Genetic ablation of PTEN causes Akt overactivation, apoptosis resistance and cavitation blockade. However, rescue experiments using mutant PTEN and pharmacological inhibition of Akt suggest that the phosphatase activity of PTEN and Akt are not involved in apoptosis-mediated cavitation. Instead, hypoxia-induced upregulation of Bnip3, a proapoptotic BH3-only protein, mediates PTEN-dependent apoptosis and cavitation. PTEN inactivation inhibits hypoxia- and reactive oxygen species-induced Bnip3 elevation. Overexpression of Bnip3 in PTEN-null EBs rescues apoptosis of the core cells. Mechanistically, suppression of Bnip3 following PTEN loss is likely due to reduction of hypoxia-inducible factor-2α (HIF-2α) because forced expression of an oxygen-stable HIF-2α mutant rescues Bnip3 expression and apoptosis. Lastly, we show that HIF-2α is upregulated by PTEN at both transcriptional and posttranscriptional levels. Ablation of prolyl hydroxylase domain-containing protein 2 (PHD2) in normal EBs or inhibition of PHD activities in PTEN-null EBs stabilizes HIF-2α and induces Bnip3 and caspase-3 activation. Altogether, these results suggest that PTEN is required for apoptosis-mediated cavitation during epithelial morphogenesis by regulating the expression of HIF-2α and Bnip3.