The contribution of the tumor microenvironment to pancreatic adenocarcinoma (PDAC) development is currently unclear. Here we show the genetic inactivation of Smoothened (Smo) in stromal fibroblasts accelerated Kras-initiated tumorigenesis. The mechanism involved destabilization of fibroblast PTEN protein. An unbiased genetic screen revealed the ubiquitin E2 conjugating enzyme UBE2K as a PTEN destabilizer and knockdown of UBE2K blocked the degradation of PTEN protein. Down-regulation of PTEN enhanced TGF-a production in stromal fibroblasts via transcription factor Gli2, and increased epithelial cell transformation and proliferation. A SMO inhibitor, GDC-0449, decreased PTEN in a Kras model and in human pancreatic tumor fibroblasts. Importantly, in PDAC patient samples, low PTEN expression correlated with low SMO expression and with reduced overall survival. The results define a pathway that reprograms stromal fibroblasts from tumor suppressive to tumor promoting. Thus, a more comprehensive understanding of tumor-stroma interactions is required to assure effective implementation of targeted therapies.