The erythro-megakaryoblastic leukemia cell line K562 undergoes erythroid or myeloid differentiation in response to treatment with various inducing agents. We observed that expression of the SH2-containing protein tyrosine phosphatase SHP-1 was induced upon exposure of K562 cells to differentiating agents. Under the same conditions, expression of SHP-2, a close relative of SHP-1, and the more distantly related PTP-1 B remained unchanged. Induction of SHP-1 expression correlates with dephosphorylation of a specific and limited set of tyrosyl phosphoproteins, suggesting that dephosphorylation of these proteins may be important for the differentiation process. Importantly, expression of exogenous SHP-1 inhibits K562 proliferation and alters the adhesion properties of these cells, indicating a more differentiated phenotype. Moreover, SHP-1 is found in a complex with both p210 Bcr-Abl and p190 Bcr-Abl, suggesting that it may regulate Bcr-Abl or Bcr-Abl-associated phosphotyrosyl proteins. Our results indicate that induction of SHP-1 expression is important for K562 differentiation in response to various inducers and raise the possibility that functional inactivation of SHP-1 may play a role in progression to blast crisis in chronic myelogenous leukemia.