Cancer development is characterized by frequent hypermethylation and gene silencing of CpG island associated promoters, including tumour suppressor genes, in parallel with hypomethylation of repeat DNA sequences and gene activation. Critical, yet unanswered questions in cancer biology remain regarding the balance of hyper- and hypo-methylation in normal and cancer cells and the potential role that CpG binding proteins play in controlling the DNA methylation landscape. Notably, methylated-DNA binding (MBD) proteins are proposed to mediate silencing of gene expression by interacting with histone deacetylases (HDACs), as well as histone methyltransferases (HMTases) to induce repressive chromatin modifications. Importantly, the MBD2 proteins play a significant role in the hypermethylation of CpG islands in cancer through their recruitment of the DNA methyltransferase enzymes. In prostate cancer, the CpG island-associated promoter of the glutathione S-transferase (GSTP1) gene is unmethylated in normal prostate, but hypermethylated and inactive in the majority of prostate cancers. Previously we have shown that the methyl binding domain protein MBD2 plays a critical role in the spread of de novo DNA methylation of the GSTP1 gene transfected into the prostate cancer cell line LNCaP. Here, to further investigate the role of MBD2 in promoting DNA hypermethylation and transcriptional repression in cancer, we performed stable shRNA knockdown of MBD2 in LNCaP cells. We show a dramatic reduction in the spread of de novo DNA methylation of transfected GSTP1 compared to the wild-type control, supporting the role of MBD2 in maintaining DNA methylation. Furthermore, using Affymetrix gene expression arrays, we show that MBD2 knockdown results in an increase in expression of 1149 endogenous genes and bisulphite-sequencing analysis reveals that this gene activation is associated with partial DNA demethylation. Our results show for the first time that MBD2 plays a central role in promoting DNA methylation and transcriptional deregulation in cancer and that the homeostasis of methylation is dynamic and can be shifted by differential MBD2 binding in cancer cells.