LAR is a widely expressed receptor-like protein tyrosine phosphatase that is implicated in regulation of intracellular signaling triggered by both cell adhesion and peptide growth factors. Genetic studies revealed that LAR regulates neuron axon path finding in Drosophila and mammary gland epithelial cell differentiation in mice. The molecular mechanism underlying the tissue specific function of LAR has not been clearly understood. We investigated the role and mechanism of LAR in peptide growth factors EGF and FGF signaling in human tissue culture cells in which the expression of LAR is under the control of an inducible promoter. We found that although both EGF and FGF induce activation of mitogen-activated protein kinase (MAPK), LAR only inhibits FGF-induced MAPK activation. LAR does not interact directly with the peptide growth factor receptors, since the ligand-induced autophosphorylation of growth factor receptors was not affected by induction of LAR. The specific effect of LAR on FGF-induced MAPK activation appeared to be mediated by specific inhibition of the phosphorylation of two signal transducers that act downstream of the FGF receptor, FRS2 and a 180 kDa protein, and by prevention of their interaction with the adaptor protein GRB2. In contrast, LAR selectively inhibited the epidermal growth factor (EGF)-induced phosphorylation of p130CAS and the formation of the complex between p130CAS and GRB2 but this effect did not influence the activation of MAPK by EGF. These data suggest that LAR and similar receptor-like protein tyrosine phosphatases may contribute to the regulation of transmembrane signaling by selectively inhibiting the tyrosine phosphorylation of specific signal transducers that act downstream of the plasma membrane-associated tyrosine kinases. The consequent inhibition of the formation of signaling complexes by these proteins may contribute to the specificity of the signals generated by specific peptide growth factors as well as extracellular matrix proteins.