We reported previously (Cayabyab, F. S., and Schlichter, L. C. (2002) J. Biol. Chem. 277, 13673-13681) a functional interaction between the ERG-1 K(+) channel and Src tyrosine kinase, which increased the current. We now show that the tyrosine phosphatase, SHP-1, which is present in microglia, is increased after brain damage, and is activated by colony-stimulating factor-1, associates with ERG-1 and regulates the current. Patch clamp recordings from the MLS-9 microglia cells were made with pipette solutions containing a recombinant SHP-1 protein: wild type (SHP-1 wild type (wt)), catalytically active (SHP-1 S6), or the substrate-trapping mutant (SHP-1 Cys --> Ser). SHP-1 wt and SHP-1 S6 proteins decreased the current, an effect that was reversed by the phosphatase inhibitor, pervanadate, whereas SHP-1 Cys --> Ser increased the current. Moreover, transient transfection with cDNA for SHP-1 wt or SHP-1 S6 decreased the ERG current without decreasing the protein level. Tyrosine phosphorylation of ERG-1 was decreased by transfection with SHP-1 wt and increased by SHP-1 Cys --> Ser. The decrease in current by active SHP-1 was partly attributed to changes in the voltage dependence of activation and steady-state conductance, whereas inactivation kinetics and voltage dependence were not affected. Our results show that ERG-1 is a SHP-1 substrate constituting the first report that an ion current is regulated by SHP-1.