The 21-kDa dual specific protein phosphatase VH1-related (VHR) is one of the smallest known phosphatases, and its function has remained obscure. We report that this enzyme is expressed in lymphoid cells and is not induced by T cell antigen receptor like other dual specificity phosphatases. Introduction of exogenous VHR into Jurkat T cells caused a marked decrease in the transcriptional activation of a nuclear factor of activated T cells and an activator protein-1-driven reporter gene in response to ligation of T cell antigen receptors. The inhibition was dose-dependent and was similar at different doses of anti-receptor antibody. Catalytically inactive VHR mutants caused an increase in gene activation, suggesting a role for endogenous VHR in this response. In contrast, the activation of a nuclear factor kappaB-driven reporter was not affected. The inhibitory effects of VHR were also seen at the level of the mitogen-activated kinases Erk1, Erk2, Jnk1, Jnk2, and on reporter genes that directly depend on these kinases, namely Elk, c-Jun, and activator protein-1. In contrast, p38 kinase activation was not affected by VHR, and p38-assisted gene activation was less sensitive. Our results suggest that VHR is a negative regulator of the Erk and Jnk pathways in T cells and, therefore, may play a role in aspects of T lymphocyte physiology that depend on these kinases.