Zwicker [Biol. Cybern. 35, 243-250, (1979); J. Acoust. Soc. Am. 80, 163-176 (1986)] has previously proposed that many nonlinear phenomena in the mammalian cochlea can be explained by saturation of a positive feedback process which enhances mechanical sensitivity, although the site of the nonlinearity producing this saturation has so far remained obscure. In this paper we present evidence suggesting that the nonlinearity of mechano-electrical transduction in the outer hair cells is the dominant nonlinearity producing two-tone suppression in the mammalian cochlea. In particular, we show that: (i) suppression of the extracellular summating potential (SP), recorded from a particular place within the organ of Corti, has characteristics similar to the suppression of activity in the auditory-nerve; (ii) that SP suppression occurs at approximately constant basilar membrane displacement, inferred from the SP iso-response contours; and that (iii) the onset of SP suppression with suppressor tones on the tail of the frequency tuning curve closely parallels the onset of nonlinearity in the local cochlear microphonic. Since previous studies (Patuzzi et al., 1989) have demonstrated that the vibration of the basilar membrane at its characteristic frequency is very sensitive to changes in outer hair cell receptor current, we consider that interference in outer hair cell currents caused by nonlinearity in mechano-electrical transduction is an adequate explanation of two-tone suppression. This requires that outer hair cell receptor currents deviate from linearity at a suppressor tone level below that required to produce a significant DC receptor potential within the inner hair cells, and that the active process within the cochlea is distributed along a local region of the cochlea, basal of the vibration peak.