The proline-, glutamic acid-, serine- and threonine-enriched protein tyrosine phosphatase PEP, which is expressed primarily in hematopoietic cells, was recently discovered to be physically associated with the 50-kDa cytosolic protein tyrosine kinase (PTK) Csk, an important suppressor of Src family PTK, including Lck and Fyn in T cells. We report that this phosphatase has an inhibitory effect on TCR-induced transcriptional activation of the c-fos proto-oncogene and elements from the IL-2 gene promoter. Catalytically inactive mutants of PEP had no effects in these assays. Expression of PEP also reduced activation of the N-terminal c-Jun kinase Jnk2 in response to receptor ligation, but not in response to UV light. In agreement with a more receptor-proximal site of action, we found that PEP reduced the TCR-induced increase in tyrosine phosphorylation of an Lck mutant, Lck-Y505F, which is only phosphorylated on tyrosine 394, the positive regulatory site. Finally, we observed that PEP reduced c-fos activation in a synergistic manner with Csk, supporting the notion that these two enzymes form a functional team acting on Src family kinases involved in TCR signaling.