Promoter methylation plays a vital role in tumorigenesis through transcriptional silencing of tumor suppressive genes. Using genome-wide methylation array, we first identified PBX/Knotted Homeobox 2 (PKNOX2) as a candidate tumor suppressor in gastric cancer. PKNOX2 mRNA expression is largely silenced in gastric cancer cell lines and primary gastric cancer via promoter methylation. Promoter methylation of PKNOX2 was associated with poor survival in gastric cancer patients. A series of in vitro and in vivo functional studies revealed that PKNOX2 functions as a tumor suppressor. Ectopic PKNOX2 expression inhibited cell proliferation in GC cell lines and suppressed growth of tumor xenografts in mice via induction of apoptosis and cell cycle arrest; and suppressed cell migration and invasion by blocking epithelial-to-mesenchymal transition. On the other hand, knockdown PKNOX2 in normal gastric epithelial cells triggered diverse malignant phenotypes. Mechanistically, PKNOX2 exerts its tumor suppressive effect by promoting the up-regulation of Insulin like Growth Factor Binding Protein 5 (IGFBP5) and TP53. PKNOX2 binds to the promoter regions of IGFBP5 and TP53 and transcriptionally activated their expression by chromatin immunoprecipitation (ChIP)-PCR assay. IGFBP5 knockdown partly abrogated tumor suppressive effect of PKNOX2, indicating that the function(s) of PKNOX2 are dependent on IGFBP5. IGFBP5 promoted PKNOX2-mediated up-regulation of p53. As a consequence, p53 transcription target genes were coordinately up-regulated in PKNOX2-expressing GC cells, leading to tumor suppression. In summary, our results identified PKNOX2 as a tumor suppressor in gastric cancer by activation of IGFBP5 and p53 signaling pathways. PKNOX2 promoter hypermethylation might be a biomarker for the poor survival of gastric cancer patients.