The dual specificity mitogen-activated protein kinase phosphatase MKP3 has been shown to down-regulate mitogenic signaling through dephosphorylation of extracellular signal-regulated kinase (ERK). Camps et al. (Camps, M., Nichols, A., Gillieron, C., Antonsson, B., Muda, M., Chabert, C., Boschert, U., and Arkinstall, S. (1998) Science 280, 1262-1265) had demonstrated that ERK binding to the noncatalytic amino-terminal domain of MKP3 can dramatically activate the phosphatase catalytic domain. The physical basis for this activation has not been established. Here, we provide detailed biochemical evidence that ERK activates MKP3 through the stabilization of the active phosphatase conformation, inducing closure of the catalytic "general acid" loop. In the closed conformation, this loop structure can participate efficiently in general acid/base catalysis, substrate binding, and transition-state stabilization. The pH activity profiles of ERK-activated MKP3 clearly indicated the involvement of general acid catalysis, a hallmark of protein-tyrosine phosphatase catalysis. In contrast, unactivated MKP3 did not display this enzymatic group as critical for the low activity form of the enzyme. Using a combination of Brönsted analyses, pre-steady-state and steady-state kinetics, we have isolated all catalytic steps in the reaction and have quantified the specific rate enhancement. Through protonation of the leaving group and transition-state stabilization, activated MKP3 catalyzes formation of the phosphoenzyme intermediate approximately 100-fold faster than unactivated enzyme. In addition, ERK-activated MKP3 catalyzes intermediate hydrolysis 5-6-fold more efficiently and binds ligands up to 19-fold more tightly. Consistent with ERK stabilizing the active conformation of MKP3, the chemical chaperone dimethyl sulfoxide was able to mimic this activation. A general protein-tyrosine phosphatase regulatory mechanism involving the flexible general acid loop is discussed.