There is increasing interest in elucidating the mechanisms involved in the negative regulation of lymphocyte activation. Herein, we show that the cytosolic protein tyrosine phosphatase PTP-PEST is expressed abundantly in a wide variety of haemopoietic cell types, including B cells and T cells. In a model B-cell line, PTP-PEST was found to be constitutively associated with several signalling molecules, including Shc, paxillin, Csk and Cas. The interaction between Shc and PTP-PEST was augmented further by antigen receptor stimulation. Overexpression studies, antisense experiments and structure-function analyses provided evidence that PTP-PEST is an efficient negative regulator of lymphocyte activation. This function correlated with the ability of PTP-PEST to induce dephosphorylation of Shc, Pyk2, Fak and Cas, and inactivate the Ras pathway. Taken together, these data suggest that PTP-PEST is a novel and unique component of the inhibitory signalling machinery in lymphocytes.