Tyrosine phosphorylation by unidentified enzymes has been observed in mitochondria, with recent evidence indicating that non-receptorial tyrosine kinases belonging to the Src family, which represent key players in several transduction pathways, are constitutively present in mitochondria. The extent of protein phosphorylation reflects a coordination balance between the activities of specific kinases and phophatases. The present study demonstrates that purified rat brain mitochondria possess endogenous tyrosine phosphatase activity. Mitochondrial phosphatases were found to be capable of dephosphorylating different exogenous substrates, including paranitrophenylphosphate, (32)P-poly(Glu-Tyr)(4:1) and (32)P-angiotensin. These activities are strongly inhibited by peroxovanadate, a well-known inhibitor of tyrosine phosphatases, but not by inhibitors of alkali or Ser/Thr phosphatases, and mainly take place in the intermembrane space and outer mitochondrial membrane. Using a combination of approaches, we identified the tyrosine phosphatase Shp-2 in mitochondria. Shp-2 plays a crucial role in a number of intracellular signalling cascades and is probably involved in several human diseases. It thus represents the first tyrosine phosphatase shown to be present in mitochondria.