Receptor tyrosine kinases (RTKs) play distinct roles in multiple biological systems. Many RTKs transmit similar signals, raising questions about how specificity is achieved. One potential mechanism for RTK specificity is control of the magnitude and kinetics of activation of downstream pathways. We have found that the protein tyrosine phosphatase Shp2 regulates the strength and duration of phosphatidylinositol 3'-kinase (PI3K) activation in the epidermal growth factor (EGF) receptor signaling pathway. Shp2 mutant fibroblasts exhibit increased association of the p85 subunit of PI3K with the scaffolding adapter Gab1 compared to that for wild-type (WT) fibroblasts or Shp2 mutant cells reconstituted with WT Shp2. Far-Western analysis suggests increased phosphorylation of p85 binding sites on Gab1. Gab1-associated PI3K activity is increased and PI3K-dependent downstream signals are enhanced in Shp2 mutant cells following EGF stimulation. Analogous results are obtained in fibroblasts inducibly expressing dominant-negative Shp2. Our results suggest that, in addition to its role as a positive component of the Ras-Erk pathway, Shp2 negatively regulates EGF-dependent PI3K activation by dephosphorylating Gab1 p85 binding sites, thereby terminating a previously proposed Gab1-PI3K positive feedback loop. Activation of PI3K-dependent pathways following stimulation by other growth factors is unaffected or decreased in Shp2 mutant cells. Thus, Shp2 regulates the kinetics and magnitude of RTK signaling in a receptor-specific manner.