The phosphorylation of proteins at tyrosine residues is critical in cellular signal transduction, neoplastic transformation and control of the mitotic cycle. These mechanisms are regulated by the activities of both protein-tyrosine kinases (PTKs) and protein-tyrosine phosphatases (PTPases). As in the PTKs, there are two classes of PTPases: membrane associated, receptor-like enzymes and soluble proteins. Here we report the isolation of a complementary DNA clone encoding a new form of soluble PTPase, PTP1C. The enzyme possesses a large noncatalytic region at the N terminus which unexpectedly contains two adjacent copies of the Src homology region 2 (the SH2 domain) found in various nonreceptor PTKs and other cytoplasmic signalling proteins. As with other SH2 sequences, the SH2 domains of PTP1C formed high-affinity complexes with the activated epidermal growth factor receptor and other phosphotyrosine-containing proteins. These results suggest that the SH2 regions in PTP1C may interact with other cellular components to modulate its own phosphatase activity against interacting substrates. PTPase activity may thus directly link growth factor receptors and other signalling proteins through protein-tyrosine phosphorylation.