The small GTPase Rho regulates cell morphogenesis through remodeling of the actin cytoskeleton. While Rho is overexpressed in many clinical cancers, the role of Rho signaling in oncogenesis remains unknown. mDia1 is a Rho effector producing straight actin filaments. Here we transduced mouse embryonic fibroblasts from mDia1-deficient mice with temperature-sensitive v-Src and examined the involvement and mechanism of the Rho-mDia1 pathway in Src-induced oncogenesis. We showed that in v-Src-transduced mDia1-deficient cells, formation of actin filaments is suppressed, and v-Src in the perinuclear region does not move to focal adhesions upon a temperature shift. Consequently, membrane translocation of v-Src, v-Src-induced morphological transformation, and podosome formation are all suppressed in mDia1-deficient cells with impaired tyrosine phosphorylation. mDia1-deficient cells show reduced transformation in vitro as examined by focus formation and colony formation in soft agar and exhibit suppressed tumorigenesis and invasion when implanted in nude mice in vivo. Given overexpression of c-Src in various cancers, these findings suggest that Rho-mDia1 signaling facilitates malignant transformation and invasion by manipulating the actin cytoskeleton and targeting Src to the cell periphery.