One hallmark of acute lung injury is the disruption of the pulmonary endothelial barrier. Such disruption correlates with increased endothelial permeability, partly through the disruption of cell-cell contacts. Protein tyrosine phosphatases (PTPs) are known to affect the stability of both cell-extracellular matrix adhesions and intercellular adherens junctions (AJs). However, evidence for the role of select PTPs in regulating endothelial permeability is limited. Our investigations noted that the inhibition of PTP1B in cultured pulmonary endothelial cells (ECs), as well as in the vasculature of intact murine lungs via the transient overexpression of a catalytically inactive PTP1B, decreased the baseline resistance of cultured EC monolayers and increased the formation of edema in murine lungs, respectively. In addition, we observed that the overexpression of wild-type PTP1B enhanced basal barrier function in vitro. Immunohistochemical analyses of pulmonary ECs and the coimmunoprecipitation of murine lung homogenates demonstrated the association of PTP1B with the AJ proteins β-catenin, p120-catenin, and VE-cadherin both in vitro and ex vivo. Using LPS in a model of sepsis-induced acute lung injury, we showed that reactive oxygen species were generated in response to LPS, which correlated with enhanced PTP1B oxidation, inhibited phosphatase activity, and attenuation of the interactions between PTP1B and β-catenin, as well as enhanced β-catenin tyrosine phosphorylation. Finally, the overexpression of a cytosolic PTP1B fragment, shown to be resistant to nicotinamide adenine dinucleotide phosphate-reduced oxidase-4 (Nox4)-mediated oxidation, significantly attenuated LPS-induced endothelial barrier dysfunction and the formation of lung edema, and preserved the associations of PTP1B with AJ protein components, independent of PTP1B phosphatase activity. We conclude that PTP1B plays an important role in maintaining the pulmonary endothelial barrier, and PTP1B oxidation appears to contribute to sepsis-induced pulmonary vascular dysfunction, possibly through the disruption of AJs.