The protein tyrosine phosphatase PTP-PEST displays remarkable substrate specificity, in vitro and in vivo for p130cas a signalling intermediate implicated in mitogenic signalling, cell-adhesion induced signalling, and in transformation by a variety of oncogenes. We have identified a high affinity interaction between the SH3 domain of p130cas and a proline-rich sequence (P335PPKPPR) within the C-terminal segment of PTP-PEST. Mutation of proline 337 within this sequence to alanine significantly impairs the ability of PTP-PEST to recognise tyrosine phosphorylated p130cas as a substrate, without qualitatively affecting the selectivity of the interaction. Thus the highly specific nature of the interaction between PTP-PEST and p130cas appears to result from a combination of two distinct substrate recognition mechanisms; the catalytic domain of PTP-PEST contributes specificity to the interaction with p130cas, whereas the SH3 domain-mediated association of p130cas and PTP-PEST dramatically increases the efficiency of the interaction. Furthermore, our results indicate that one important function of the p130cas SH3 domain is to associate with PTP-PEST and thereby facilitate the dephosphorylation of p130cas, resulting in the termination of tyrosine phosphorylation-dependent signalling events downstream of p130cas.