The CD45 protein tyrosine phosphatase (PTPase) has been shown to regulate the activity of Lck and Fyn protein tyrosine kinases in T cells. However, it is not clear that these constitute the only CD45 substrates. Moreover, the manner by which PTPase activity and substrate recruitment are regulated, is poorly understood. Previous in vitro studies suggest that the first cytoplasmic PTPase domain (D1) of CD45 is the active PTPase, which may be regulated by an enzymatically inactive second PTPase domain (D2). However, the function of CD45 D2 in vivo is unknown. In this study, reconstitution of CD45(-) T cells with specific CD45 PTPase mutants allowed demonstration of a critical role for D2 in TCR-mediated interleukin (IL)-2 production. Specifically, replacement of CD45 D2 with that of the LAR PTPase to form a CD45/LAR:D2 chimera, abrogates CD45-dependent IL-2 production. This effect cannot be accounted for by loss of PTPase activity per se. The expression of D1 substrate-trapping mutants reveals an in vivo interaction between CD45 and TCR-zeta that is dependent on CD45 D2. Thus, cells expressing CD45 lacking D2 exhibit abnormal TCR-mediated signaling characterized by hyperphosphorylation of zeta and deficient ZAP-70 phosphorylation. These data suggest an essential role for CD45 D2 in TCR-regulated IL-2 production through substrate recruitment of the zeta chain.