Oncogenic signals elevate expression of Id2 in multiple tumor types. When deregulated, Id2 inactivates the tumor suppressor proteins retinoblastoma, p107, and p130. Here, we report a novel and unexpected tumor inhibitory function of Id2 in the intestinal epithelium. First, genetic ablation of Id2 in the mouse prevents differentiation and cell cycle arrest of enterocytes at the time of formation of the crypt-villus unit. Later, these developmental abnormalities evolve toward neoplastic transformation with complete penetrance. Id2-null tumors contain severe dysplastic and metaplastic lesions and express aberrant amounts of β-catenin. Thus, our data are the first to establish a direct requirement of basic helix-loop-helix inhibitors in driving differentiation and define an unexpected role for the retinoblastoma-binding protein Id2 in preventing tumor formation.