The p210 bcr-abl protein tyrosine kinase (PTK) appears to be directly responsible for the initial manifestations of chronic myelogenous leukemia (CML). In contrast to the extensive characterization of the PTK and its effects on cell function, relatively little is known about the nature of the protein tyrosine phosphatases (PTPs) that may modulate p210 bcr-abl-induced signalling. In this study, we have demonstrated that expression of PTP1B is enhanced specifically in various cells expressing p210 bcr-abl, including a cell line derived from a patient with CML. This effect on expression of PTP1B required the kinase activity of p210 bcr-abl and occurred rapidly, concomitant with maximal activation of a temperature-sensitive mutant of the PTK. The effect is apparently specific for PTP1B since, among several PTPs tested, we detected no change in the levels of TCPTP, the closest relative of PTP1B. We have developed a strategy for identification of physiological substrates of individual PTPs which utilizes substrate-trapping mutant forms of the enzymes that retain the ability to bind to substrate but fail to catalyze efficient dephosphorylation. We have observed association between a substrate-trapping mutant of PTP1B (PTP1B-D181A) and p210 bcr-abl, but not v-Abl, in a cellular context. Consistent with the trapping data, we observed dephosphorylation of p210 bcr-abl, but not v-Abl, by PTP1B in vivo. We have demonstrated that PTP1B inhibited binding of the adapter protein Grb2 to p210 bcr-abl and suppressed p210 bcr-abl-induced transcriptional activation that is dependent on Ras. These results illustrate selectivity in the effects of PTPs in a cellular context and suggest that PTP1B may function as a specific, negative regulator of p210 bcr-abl signalling in vivo.