The gene product of Vaccinia virus gene H1, VH1, is the first identified dual specificity phosphatase (DSP). The human genome encodes 38 different VH1-like DSPs, which include major regulators of signaling pathways, highly dysregulated in disease states. VH1 down-regulates cellular antiviral response by dephosphorylating activated STAT1 in the IFN-γ/STAT1 signaling pathway. In this report, we have investigated the molecular basis for VH1 catalytic activity. Using small-angle x-ray scattering (SAXS), we determined that VH1 exists in solution as a boomerang-shaped dimer. Targeted alanine mutations in the dimerization domain (aa 1-27) decrease phosphatase activity while leaving the dimer intact. Deletion of the N-terminal dimer swapped helix (aa 1-20) completely abolishes dimerization and severely reduces phosphatase activity. An engineered chimera of VH1 that contains only one active site retains wild-type levels of catalytic activity. Thus, a dimeric quaternary structure, as opposed to two cooperative active sites within the same dimer is essential for VH1 catalytic activity. Together with laforin, VH1 is the second DSP reported in literature for which dimerization via an N-terminal dimerization domain is necessary for optimal catalytic activity. We propose that dimerization may represent a common mechanism to regulate the activity and substrate recognition of DSPs, often assumed to function as monomers.