SH-PTP2 is a nontransmembrane human protein-tyrosine phosphatase that contains two Src homology 2 (SH2) domains and binds to insulin receptor substrate 1 (IRS-1) via these domains in response to insulin. The expression of a catalytically inactive mutant of SH-PTP2 (containing the mutation Cys-459-->Ser) in Chinese hamster ovary cells that overexpress human insulin receptors (CHO-IR cells) markedly attenuated insulin-stimulated Ras activation. Expression of mutant SH-PTP2 also inhibited MAP kinase activation in response to insulin but not in response to 12-O-tetradecanoyl phorbol-13-acetate. In contrast, the insulin-induced association of phosphoinositide 3-kinase activity with IRS-1 was not affected by the expression of inactive SH-PTP2. Furthermore, the expression of mutant SH-PTP2 had no effect on the binding of Grb2 to IRS-1, on the tyrosine phosphorylation of Shc, or on the formation of the complex between Shc and Grb2 in response to insulin. However, the amount of SH-PTP2 bound to IRS-1 in insulin-treated CHO-IR cells expressing mutant SH-PTP2 was greater than that observed in CHO-IR cells overexpressing wild-type SH-PTP2. Recombinant SH-PTP2 specifically dephosphorylated a synthetic phosphopeptide corresponding to the sequence surrounding Tyr-1172 of IRS-1, a putative binding site for SH-PTP2. Additionally, phenylarsine oxide, an inhibitor of protein-tyrosine phosphatases, inactivated SH-PTP2 in vitro and increased the insulin-induced association of SH-PTP2 with IRS-1. These results suggest that SH-PTP2 may regulate an upstream element necessary for Ras activation in response to insulin and that this upstream element may be required for the Grb2- or Shc-dependent pathway. Furthermore, these results are consistent with the notion that SH-PTP2 may bind to IRS-1 through its SH2 domains in response to insulin and dephosphorylate the phosphotyrosine residue to which it binds, thereby regulating its association with IRS-1.