Cell surface expression of CD45, a receptor-like protein tyrosine phosphatase (PTPase), is required for T cell antigen receptor (TCR)-mediated signal transduction. Like the majority of transmembrane PTPases, CD45 contains two cytoplasmic phosphatase domains, whose relative in vivo function is not known. Site-directed mutagenesis of the individual catalytic residues of the two CD45 phosphatase domains indicates that the catalytic activity of the membrane-proximal domain is both necessary and sufficient for restoration of TCR signal transduction in a CD45-deficient cell. The putative catalytic activity of the distal phosphatase domain is not required for proximal TCR-mediated signaling events. Moreover, in the context of a chimeric PTPase receptor, the putative catalytic activity of the distal phosphatase domain is not required for ligand-induced negative regulation of PTPase function. We also demonstrate that the phosphorylation of the C-terminal tyrosine of Lck, a site of negative regulation, is reduced only when CD45 mutants with demonstrable in vitro phosphatase activity are introduced into the CD45-deficient cells. These results demonstrate that the phosphatase activity of CD45 is critical for TCR signaling, and for regulating the levels of C-terminal phosphorylated Lck molecules.