The neuronal K(+)-Cl(-) cotransporter (KCC2) is a membrane transport protein that extrudes Cl(-) from neurons and helps maintain low intracellular [Cl(-)] and hyperpolarizing GABAergic synaptic potentials. Depolarizing gamma-aminobutyric acid (GABA) responses in neonatal neurons and following various forms of neuronal injury are associated with reduced levels of KCC2 expression. Despite the importance for plasticity of inhibitory transmission, less is known about cellular mechanisms involved in more dynamic changes in KCC2 function. In this study, we investigated the role of tyrosine phosphorylation in KCC2 localization and function in hippocampal neurons and in cultured GT1-7 cells. Mutation to the putative tyrosine phosphorylation site within the long intracellular carboxyl terminus of KCC2(Y1087D) or application of the tyrosine kinase inhibitor genistein shifted the GABA reversal potential (E(GABA)) to more depolarized values, indicating reduced KCC2 function. This was associated with a change in the expression pattern of KCC2 from a punctate distribution to a more uniform distribution, suggesting that functional tyrosine-phosphorylated KCC2 forms clusters in restricted membrane domains. Sodium vanadate, a tyrosine phosphatase inhibitor, increased the proportion of KCC2 associated with lipid rafts membrane domains. Loss of tyrosine phosphorylation also reduced oligomerization of KCC2. A loss of the punctuate distribution and oligomerization of KCC2 and a more depolarized E(GABA) were seen when the 28-amino-acid carboxyl terminus of KCC2 was deleted. These results indicate that direct tyrosine phosphorylation of KCC2 results in membrane clusters and functional transport activity, suggesting a mechanism by which intracellular Cl(-) concentrations and GABA responses can be rapidly modulated.