Receptor protein-tyrosine phosphatase alpha (RPTPalpha) is a transmembrane protein with tandem cytoplasmic phosphatase domains. Most of the catalytic activity is contained by the membrane-proximal catalytic domain (D1). We found a spontaneous Arg554 to His mutation in the pTyr recognition loop of the membrane-distal phosphatase domain (D2) of a human patient. This mutation was not linked to the disease. Here, we report that the R554H mutation abolished RPTPalpha-D2 catalytic activity. The R554H mutation impaired Src binding to RPTPalpha. RPTPalpha, with a catalytic site cysteine to serine mutation in D2, also displayed diminished binding to Src. Concomitant with decreased Src binding of the R554H and C723S mutants compared with wild-type RPTPalpha, enhanced phosphorylation of the inhibitory Src Tyr527 site was observed, as well as reduced Src activation. To confirm that catalytic activity of RPTPalpha-D2 was required for these effects, we analyzed a third mutant, RPTPalpha-R729K, which had an inactive D2. Again, Src binding was reduced and Tyr527 phosphorylation was enhanced. Our results suggest that a catalytically active D2 is required for RPTPalpha to bind and dephosphorylate its well-characterized substrate, Src.