Protein-tyrosine phosphatases (PTPases) regulate insulin signaling by catalyzing the tyrosine dephosphorylation of the insulin receptor and its substrate proteins. Previous studies have implicated a PTPase localized to a cell membrane fraction in the regulation of the insulin receptor in situ. LAR (leukoyte antigen related) is a transmembrane PTPase in insulin-sensitive tissues with in vitro catalytic specificity for the insulin receptor kinase domain. When transfected into Chinese hamster ovary cells overexpressing the human insulin receptor (CHO-hlR), the LAR protein was processed as expected into an 85-kDa subunit containing the transmembrane and cytoplasmic domains. LAR was increased an average of 6-fold in clonal lines of stably transfected cells, and cell fractionation confirmed its localization in the cell membrane. After stimulation with 100 nM insulin, tyrosine phosphorylation of the insulin receptor was decreased by 31% at 1 min (P < 0.01) and by 42% at 10 min (P < 0.01), and that of IRS-1 was decreased by 34% (P < 0.01) at 1 min and by 56% (P < 0.01) at 10 min in the LAR-overexpressing cells compared with empty vector transfectants. LAR overexpression also blocked insulin-stimulated receptor kinase activation as well as thymidine incorporation into DNA. Quantitatively similar results were obtained in populations of CHO-hlR cells transfected transiently by electroporation. In contrast, overexpression of recombinant LAR cytoplasmic domain, detected as a 72-kDa protein in the cell cytosol, did not significantly affect the insulin-stimulated tyrosine phosphorylation of the insulin receptor or IRS-1 (99% and 93% of control at 10 min, respectively). These studies provide the first evidence that increased expression of LAR has negative regulatory effects at a proximal site in the insulin-signaling pathway. Since this effect occurs only when LAR is eutopically expressed at the cell membrane, these data further suggest that LAR requires a transmembrane localization to directly interact with the insulin receptor in situ.