We present the functional characterization of a pseudogene associated recurrent gene fusion in prostate cancer. The fusion gene KLK4-KLKP1 is formed by the fusion of the protein coding gene KLK4 with the noncoding pseudogene KLKP1. Screening of a cohort of 659 patients (380 Caucasian American; 250 African American, and 29 patients from other races) revealed that the KLK4-KLKP1 is expressed in about 32% of prostate cancer patients. Correlative analysis with other ETS gene fusions and SPINK1 revealed a concomitant expression pattern of KLK4-KLKP1 with ERG and a mutually exclusive expression pattern with SPINK1, ETV1, ETV4, and ETV5. Development of an antibody specific to KLK4-KLKP1 fusion protein confirmed the expression of the full-length KLK4-KLKP1 protein in prostate tissues. The in vitro and in vivo functional assays to study the oncogenic properties of KLK4-KLKP1 confirmed its role in cell proliferation, cell invasion, intravasation, and tumor formation. Presence of strong ERG and AR binding sites located at the fusion junction in KLK4-KLKP1 suggests that the fusion gene is regulated by ERG and AR. Correlative analysis of clinical data showed an association of KLK4-KLKP1 with lower preoperative PSA values and in young men (<50 years) with prostate cancer. Screening of patient urine samples showed that KLK4-KLKP1 can be detected noninvasively in urine. Taken together, we present KLK4-KLKP1 as a class of pseudogene associated fusion transcript in cancer with potential applications as a biomarker for routine screening of prostate cancer.