SHP-1, an SH2 domain-containing tyrosine phosphatase, has a crucial role in hematopoiesis. Here we report that SHP-1 is associated with two major tyrosine-phosphorylated proteins in hematopoietic cells treated with the tyrosine phosphatase inhibitor, pervanadate. One of the proteins corresponds to leukocyte-associated Ig-like receptor-1 (LAIR-1), a recently cloned transmembrane protein. Molecular cloning revealed four isoforms of the protein. LAIR-1 is hyper-phosphorylated on tyrosyl residues in cells overexpressing a catalytically inactive mutant form of SHP-1 as well as in pervanadate-treated cells. An antibody against the extracellular domain of the protein also induced its tyrosine phosphorylation. Tyrosine-phosphorylated LAIR-1 specifically interacts with SHP-1 but not with SHP-2, a structurally related tyrosine phosphatase. Using site-specific mutagenesis, we demonstrated that Tyr(233) and Tyr(263), each embedded in an immunoreceptor tyrosine-based inhibitory motif, are responsible for tyrosine phosphorylation of LAIR-1 and recruitment of SHP-1. Both tyrosyl residues are required for SHP-1 binding. Protein kinases responsible for tyrosine phosphorylation of LAIR-1 may belong to the Src family since PP1, a Src family kinase inhibitor, significantly inhibited its phosphorylation. As a major binding protein of SHP-1 on the plasma membrane, LAIR-1 may play an important role in hematopoietic cell signaling.