The roles of the 8 conserved cysteines and 1 arginine in the low molecular weight phosphotyrosyl protein phosphatases were investigated using site-directed mutagenesis of the recombinant bovine heart enzyme. Single mutants of cysteine to serine were studied for each cysteine; alanine replacements were also made for Cys-12, Cys-17, and Arg-18. The CD spectra of the purified proteins were effectively superimposable, consistent with the conclusion that no major structural alterations had occurred, but 1H NMR spectroscopy did reveal some spectral shifts in the aromatic region. Kinetic analysis of the mutant proteins demonstrated that only Cys-12, Cys-17, and Arg-18 had significantly altered catalytic activity toward the substrate p-nitrophenyl phosphate at pH 5. The Cys-12 and Arg-18 mutants were effectively inactive. Thus, it is concluded that Cys-12 is the catalytic nucleophile, and Arg-18 presumably serves an essential function in substrate binding. The C17S mutant had 6% residual activity compared with wild type protein, whereas the C17A mutant had 37% activity. Consistent with the observed activity of the Cys-17 mutant, a covalent phosphocysteine intermediate was trapped and identified by 31P NMR. Further kinetic analysis of C17A using several aryl phosphate monoester substrates with different leaving group pK alpha values indicated that no change in the rate-determining step of the catalytic mechanism had occurred, that is, dephosphorylation of the covalent phosphoenzyme intermediate remains rate-limiting. The C17A mutant had a 4-fold higher phosphate Ki and slightly higher Km values for p-nitrophenyl phosphate suggesting that Cys-17 may be important for optimal positioning of the substrate phosphate moiety.