The involvement of murine protein tyrosine phosphatase-PEST (MPTP-PEST) in signal transduction pathways is suggested by its ability to dephosphorylate phosphotyrosine residues, its interaction with the adaptor protein SHC and by the presence of five proline-rich stretches in its non-catalytic carboxyl terminus. Proline-rich sequences have been identified as binding sites for Src homology 3 (SH3) domains found in proteins associated with signal transduction events. The ability of these sequences to act as SH3 domain recognition motifs was investigated using bacterially expressed SH3 domains derived from several different signalling proteins. In vitro binding assays indicate that four of these proline-rich sequences constitute specific binding sites for both SH3 domains of the adaptor molecule Grb2. Wild type Grb2, but not Grb2 proteins corresponding to loss-of-function mutants in the Caenorhabditis elegans sem-5 protein, associate with MPTP-PEST in vivo. Experiments in EGF receptor expressing cells show that the interaction between MPTP-PEST and Grb2 results in the binding of this complex to activated EGF receptors. In addition, identification of putative substrate(s) of MPTP-PEST have revealed a candidate protein of approximately 120 kDa which is tyrosine phosphorylated upon EGF stimulation. Together, these results describe a novel SH3 domain-dependent recruitment of a protein tyrosine phosphatase to an activated receptor tyrosine kinase and establish a potential role for MPTP-PEST in signalling pathways at the molecular level.