Using genome-wide methylation screening, we identified that paired box gene 5 (PAX5) is involved in human cancer development. However, the function of PAX5 in gastric cancer (GC) development is largely unclear. We analyzed its epigenetic inactivation, biological functions and clinical application in GC. PAX5 was silenced in seven out of eight GC cell lines. A significant downregulation was also detected in paired gastric tumors compared with adjacent non-cancerous tissues. The downregulation of PAX5 was closely linked to the promoter hypermethylation status and could be restored with demethylation treatment. Ectopic expression of PAX5 in silenced GC cell lines (AGS and BGC823) inhibited colony formation and cell viability, arrested cell cycle, induced apoptosis, suppressed cell migration and invasion and repressed tumorigenicity in nude mice. Consistent with the induction of apoptosis by PAX5 in vitro, terminal deoxynucleotidyl transferase-mediated dUTP-digoxigenin nick end labeling (TUNEL) staining showed significantly enhanced apoptotic cells in PAX5-expressed tumors compared with the vector control tumors. On the other hand, knockdown of PAX5 by PAX5-short hairpin RNA increased the cell viability and proliferation. The anti-tumorigenic function of PAX5 was revealed to be mediated by upregulating downstream targets of tumor protein 53 (p53), p21, BCL2-associated X protein, metastasis suppressor 1 and tissue inhibitors of metalloproteinase 1, and downregulating BCL2, cyclin D1, mesenchymal-epithelial transition factor (MET) and matrix metalloproteinase 1. Immunoprecipitation assay demonstrated that PAX5 directly bound to the promoters of p53 and MET. Moreover, PAX5 hypermethylation was detected in 77% (144 of 187) of primary GCs compared with 10.5% (2/19) of normal gastric tissues (P<0.0001). GC patients with PAX5 methylation had a significant poor survival compared with the unmethylated cases as demonstrated by Cox regression model and log-rank test. In conclusion, PAX5 is a novel functional tumor suppressor in gastric carcinogenesis. Detection of methylated PAX5 can be utilized as an independent prognostic factor in GC.Oncogene advance online publication, 21 November 2011; doi:10.1038/onc.2011.511.