Contact inhibition has been largely elusive despite that a loss of contact inhibition is a critical event for cancer development and progression. Here, we report that PHLPP1 is a binding protein for Mst1 and it modulates the Hippo pathway by dephosphorylating Mst1 at the inhibitory Thr387 of Mst1. Yap1 was localized predominantly in the nucleus but marginally in the cytoplasm in HeLa cells under sparse conditions, whereas the functional protein was more directed to sequestration in the cytoplasm under dense environments. Furthermore, loss of PHLPP1 resulted in a failure of the apoptotic control. It is interesting that down-regulated expression of PHLPP1 appears to mimic the loss of contact inhibition, a hallmark of cancer.