Tumor necrosis factor alpha-convertase (TACE) is a metalloprotease-disintegrin involved in the ectodomain shedding of several proteins and is critical for proper murine development. TACE-mediated ectodomain shedding is regulated, and the cytoplasmic domain of TACE contains several potential signaling motifs, suggesting that this domain may play a role in regulating the metalloprotease activity. Here we report that the protein-tyrosine phosphatase PTPH1, which contains both a band 4.1 domain and a single PDZ domain, can interact with the cytoplasmic domain of TACE. The interaction was initially observed in a yeast two-hybrid screen and was confirmed using an in vitro binding assay and co-immunoprecipitations from eukaryotic cell extracts. The interaction is mediated via binding of the PDZ domain of PTPH1 to the COOH terminus of TACE. The latter represents a novel group I PDZ binding sequence characterized by a terminal cysteine residue. In co-expression experiments, significantly lower levels of TACE were observed in the presence of catalytically active forms of PTPH1 compared with catalytically inactive forms of PTPH1. Furthermore, phorbol ester-stimulated shedding of the TACE substrate tumor necrosis factor-alpha was decreased in cells expressing catalytically active PTPH1 compared with inactive PTPH1. Taken together, these results suggest that PTPH1 may be a negative regulator of TACE levels and function, and thus provide the first evidence for the regulation of TACE through a cytoplasmic protein.