The myeloid restricted membrane glycoprotein, CD33, is a member of the recently characterized "sialic acid-binding immunoglobulin-related lectin" family. Although CD33 can mediate sialic acid-dependent cell interactions as a recombinant protein, its function in myeloid cells has yet to be determined. Since CD33 contains two potential immunoreceptor tyrosine-based inhibition motifs in its cytoplasmic tail, we investigated whether it might act as a signaling receptor in myeloid cells. Tyrosine phosphorylation of CD33 in myeloid cell lines was stimulated by cell surface cross-linking or by pervanadate, and inhibited by PP2, a specific inhibitor of Src family tyrosine kinases. Phosphorylated CD33 recruited both the protein-tyrosine phosphatases, SHP-1 and SHP-2. CD33 was dephosphorylated in vitro by the co-immunoprecipitated tyrosine phosphatases, suggesting that it might also be an in vivo substrate. The first CD33 phosphotyrosine motif is dominant in CD33-SHP-1/SHP-2 interactions, since mutating tyrosine 340 in a CD33-cytoplasmic tail fusion protein significantly reduced binding to SHP-1 and SHP-2 in THP-1 lysates, while mutation of tyrosine 358 had no effect. Furthermore, the NH2-terminal Src homology 2 domain of SHP-1 and SHP-2, believed to be essential for phosphatase activation, selectively bound a CD33 phosphopeptide containing tyrosine 340 but not one containing tyrosine 358. Finally, mutation of tyrosine 340 increased red blood cell binding by CD33 expressed in COS cells. Hence, CD33 signaling through selective recruitment of SHP-1/SHP-2 may modulate its ligand(s) binding activity.