Mitogen-activated protein kinases (MAPKs) mediate signaling from the cell membrane to the nucleus following their phosphorylation at conserved threonine and tyrosine residues within their activation loops. We show that protein tyrosine phosphatase epsilon (PTP epsilon) inhibits ERK1 and ERK2 kinase activity and reduces their phosphorylation; in agreement, ERK phosphorylation is increased in fibroblasts and in mammary tumor cells from mice genetically lacking PTP epsilon. PTP epsilon inhibits events downstream of ERKs, such as transcriptional activation mediated by Elk1 or by the serum response element. PTP epsilon also inhibits transcriptional activation mediated by c-Jun and C/EBP binding protein (CHOP) but not that mediated by the unrelated NFkB, attesting that it is broadly active within the MAPK family but otherwise specific. The effect of PTP epsilon on ERKs is at least in part indirect because phosphorylation of the threonine residue in the ERK activation loop is reduced in the presence of PTP epsilon. Nonetheless, PTP epsilon is present in a molecular complex with ERK, providing PTP epsilon with opportunity to act on ERK proteins also directly. We conclude that PTP epsilon is a physiological inhibitor of ERK signaling. Slow induction of PTP epsilon and its lack of nuclear translocation following mitogenic stimulation suggest that PTP epsilon functions to prevent inappropriate activation and to terminate prolonged, rather than acute, activation of ERK in the cytosol.