The TMPRSS2-ERG gene fusion is the most frequent alteration observed in human prostate cancer. However, its role in disease progression is still unclear. In this study, we uncover an important mechanism promoting ERG oncogenic activity. We show that ERG is methylated by Enhancer of zest homolog 2 (EZH2) at a specific lysine residue (K362) located within the internal auto-inhibitory domain. Mechanistically, K362 methylation modifies intra-domain interactions, favors DNA binding and enhances ERG transcriptional activity. In a genetically engineered mouse model of ERG fusion-positive prostate cancer (Pb-Cre4 Pten Rosa26-ERG, ERG/PTEN), ERG K362 methylation is associated with PTEN loss and progression to invasive adenocarcinomas. In both ERG positive VCaP cells and ERG/PTEN mice, PTEN loss results in AKT activation and EZH2 phosphorylation at serine 21 that favors ERG methylation. We find that ERG and EZH2 interact and co-occupy several sites in the genome forming trans-activating complexes. Consistently, ERG/EZH2 co-regulated target genes are deregulated preferentially in tumors with concomitant ERG gain and PTEN loss and in castration-resistant prostate cancers. Collectively, these findings identify ERG methylation as a post-translational modification sustaining disease progression in ERG-positive prostate cancers.