Estrogen receptor beta (ERbeta) promotes the degradation of hypoxia inducible factor 1alpha (HIF-1alpha), which contributes to the ability of this hormone receptor to sustain the differentiation of epithelial and carcinoma cells. Although the loss of ERbeta and consequent HIF-1 activation occur in prostate cancer with profound consequences, the mechanism by which ERbeta promotes the degradation of HIF-1alpha is unknown. We report that ERbeta regulates the ligand (3beta-adiol)-dependent transcription of prolyl hydroxylase 2 (PHD2) also known as Egl nine homolog 1 (EGLN1), a 2-oxoglutarate-dependent dioxygenase that hydroxylates HIF-1alpha and targets it for recognition by the von Hippel-Lindau tumor suppressor and consequent degradation. ERbeta promotes PHD2 transcription by interacting with a unique estrogen response element in the 5' UTR of the PHD2 gene that functions as an enhancer. PHD2 itself is critical for maintaining epithelial differentiation. Loss of PHD2 expression or inhibition of its function results in dedifferentiation with characteristics of an epithelial-mesenchymal transition, and exogenous PHD2 expression in dedifferentiated cells can restore an epithelial phenotype. Moreover, expression of HIF-1alpha in cells that express PHD2 does not induce dedifferentiation but expression of HIF-1alpha containing mutations in the proline residues that are hydroxylated by PHD2 induces dedifferentiation. These data describe a unique mechanism for the regulation of HIF-1alpha stability that involves ERbeta-mediated transcriptional regulation of PHD2 and they highlight an unexpected role for PHD2 in maintaining epithelial differentiation.