Intratumoral heterogeneity in bladder cancer is a barrier to accurate molecular sub-classification and treatment efficacy. However, individual cellular and mechanistic contributions to tumor heterogeneity are controversial. We examined potential mechanisms of FOXA1 and PTEN inactivation in bladder cancer and their contribution to tumor heterogeneity. These analyses were complemented with inactivation of FOXA1 and PTEN in intermediate and luminal mouse urothelium. We show inactivation and reduced expression of FOXA1 and PTEN is prevalent in human disease, where PTEN and FOXA1 are downregulated by allelic loss and site-specific DNA hypermethylation, respectively. Conditional inactivation of both Foxa1 and Pten in intermediate/luminal cells in mice results in development of bladder cancer exhibiting squamous features as well as enhanced sensitivity to a bladder-specific carcinogen. In addition, FOXA1 is hypermethylated in basal bladder cancer cell lines, and this is reversed by treatment with DNA methyltransferase inhibitors. By integrating human correlative and in vivo studies, we define a critical role for PTEN loss and epigenetic silencing of FOXA1 in heterogeneous human disease and show genetic targeting of luminal/intermediate cells in mice drives squamous differentiation.