The specific activity of the Src tyrosine kinase is elevated in human colon carcinoma cells. To identify Src-binding proteins that might upregulate Src activity in these cells, a human colon carcinoma lambda gt11 expression library was screened with purified, 32P-labeled Src. The SH-PTP2 (Syp) tyrosine phosphatase was isolated and shown to associate with Src. In vitro studies demonstrated that: (1) transforming F527 Src phosphorylates Syp, and (2) Syp dephosphorylates Src at Tyr 527. Both events are known to upregulate enzyme activity. Others have shown that overexpression of the receptor tyrosine phosphatase alpha in rat embryo fibroblasts results in Src activation by dephosphorylation of Tyr 527, cell transformation and tumorigenesis. Thus, transmembrane tyrosine phosphatases may be involved in cell transformation exerting at least some of their effects through activation of Src. To the best of our knowledge, this is the first identification of an intracellular tyrosine, phosphatase which may activate Src by a similar mechanism.