We have previously reported a direct in vivo interaction between the activated insulin receptor and protein-tyrosine phosphatase-1B (PTP1B), which leads to an increase in PTP1B tyrosine phosphorylation. In order to determine if PTP1B is a substrate for the insulin receptor tyrosine kinase, the phosphorylation of the Cys 215 Ser, catalytically inactive mutant PTP1B (CS-PTP1B) was measured in the presence of partially purified and activated insulin receptor. In vitro, the insulin receptor tyrosine kinase catalyzed the tyrosine phosphorylation of PTP1B. 53% of the total cellular PTP1B became tyrosine phosphorylated in response to insulin in vivo. Tyrosine phosphorylation of PTP1B by the insulin receptor was absolutely dependent upon insulin-stimulated receptor autophosphorylation and required an intact kinase domain, containing insulin receptor tyrosines 1146, 1150 and 1151. Tyrosine phosphorylation of wild type PTP1B by the insulin receptor kinase increased phosphatase activity of the protein. Intermolecular transdephosphorylation was demonstrated both in vitro and in vivo, by dephosphorylation of phosphorylated CS-PTP1B by the active wild type enzyme either in a cell-free system or via expression of the wild type PTP1B into Hirc-M cell line, which constitutively overexpress the human insulin receptor and CS-PTP1B. These results suggest that PTP1B is a target protein for the insulin receptor tyrosine kinase and PTP1B can regulate its own phosphatase activity by maintaining the balance between its phosphorylated (the active form) and dephosphorylated (the inactive form) state.