Signaling by tyrosine kinases involves direct associations between proteins with Src homology 2 (SH2) domains and sites of tyrosine phosphorylation. Specificity in signaling pathways results in part from inherent selectivity in interactions between particular SH2 domains and phosphopeptide sequences. The cytoplasmic phosphotyrosine phosphatase SH-PTP2 (Syp, PTP 1D, PTP-2C) contains two SH2 domains (N and C) which mediate its association with and activation by the platelet-derived growth factor (PDGF) and epidermal growth factor receptors and IRS-1. We have developed a competitive phosphopeptide binding assay to analyze specificity of the SH-PTP2 N-SH2 domain for phosphorylation sites of these phosphoproteins. The sequence surrounding Tyr1009 bound with greatest affinity (ID50 = 14 microM) of eight PDGF receptor-derived phosphopeptides tested. No peptides corresponding to known epidermal growth factor receptor phosphorylation sites bound with high affinity. However, an alternative sequence surrounding Tyr954 bound tightly (ID50 = 21 microM). Of the 13 IRS-1-related peptides analyzed, sequences surrounding Tyr546, Tyr895, and Tyr1172 bound with highest affinity (ID50 = 11, 4, and 1 microM, respectively). Alternative phosphopeptides generally bound with much weaker affinity (ID50 > 150 microM). These findings are consistent with recent mutational analyses of the PDGF receptor and predict site-specific interactions between SH-PTP2 and each of these phosphoproteins. Comparisons between peptide sequences suggest that the N-terminal SH2 domain of SH-PTP2 binds with highest affinity to phosphotyrosine (pY) followed by a beta-branched residue (Val, Ile, Thr) at pY+1 and a hydrophobic residue (Val, Leu, Ile) at pY+3 positions. Peptide truncation studies also indicate that residues outside of the pY-1 to pY+4 motif are required for high affinity interactions.