Mutations in ASXL1 are frequent in patients with myelodysplastic syndrome (MDS) and are associated with adverse survival, yet the molecular pathogenesis of ASXL1 mutations (ASXL1-MT) is not fully understood. Recently, it has been found that deletion of Asxl1 or expression of C-terminal-truncating ASXL1-MTs inhibit myeloid differentiation and induce MDS-like disease in mice. Here, we find that SET-binding protein 1 (SETBP1) mutations (SETBP1-MT) are enriched among ASXL1-mutated MDS patients and associated with increased incidence of leukemic transformation, as well as shorter survival, suggesting that SETBP1-MT play a critical role in leukemic transformation of MDS. We identify that SETBP1-MT inhibit ubiquitination and subsequent degradation of SETBP1, resulting in increased expression. Expression of SETBP1-MT, in turn, inhibited protein phosphatase 2A activity, leading to Akt activation and enhanced expression of posterior Hoxa genes in ASXL1-mutant cells. Biologically, SETBP1-MT augmented ASXL1-MT-induced differentiation block, inhibited apoptosis and enhanced myeloid colony output. SETBP1-MT collaborated with ASXL1-MT in inducing acute myeloid leukemia in vivo. The combination of ASXL1-MT and SETBP1-MT activated a stem cell signature and repressed the tumor growth factor-β signaling pathway, in contrast to the ASXL1-MT-induced MDS model. These data reveal that SETBP1-MT are critical drivers of ASXL1-mutated MDS and identify several deregulated pathways as potential therapeutic targets in high-risk MDS.