Prep1 is a homeodomain transcription factor that is essential in embryonic development and functions in the adult as a tumor suppressor. We show here that Prep1 is involved in maintaining genomic stability and preventing neoplastic transformation. Hypomorphic homozygous Prep1(i/i) fetal liver cells and mouse embryonic fibroblasts (MEFs) exhibit increased basal DNA damage and normal DNA damage response after γ-irradiation compared with WT. Cytogenetic analysis shows the presence of numerous chromosomal aberrations and aneuploidy in very early-passage Prep1(i/i) MEFs. In human fibroblasts, acute Prep1 down-regulation by siRNA induces DNA damage response, like in Prep1(i/i) MEFs, together with an increase in heterochromatin-associated modifications: rapid increase of histone methylation and decreased transcription of satellite DNA. Ectopic expression of Prep1 rescues DNA damage and heterochromatin methylation. Inhibition of Suv39 activity blocks the chromatin but not the DNA damage phenotype. Finally, Prep1 deficiency facilitates cell immortalization, escape from oncogene-induced senescence, and H-Ras(V12)-dependent transformation. Importantly, the latter can be partially rescued by restoration of Prep1 level. The results show that the tumor suppressor role of Prep1 is associated with the maintenance of genomic stability.