A cDNA which encodes a protein tyrosine phosphatase with two src homology 2 (SH2) domains was isolated from a rat brain cDNA library. This phosphatase appears to be a rat homologue of PTP1D based on its amino acid sequence. The gene is expressed in a variety of tissues, and its mRNA is enriched in the brain, skeletal muscle, and lung. An RNA splice variant (PTP1Di) was also isolated which has four additional amino acid residues (Ala-Leu-Leu-Gln) in the catalytic domain. The catalytic domains of PTP1D and PTP1Di were expressed in Escherichia coli as glutathione S-transferase fusion proteins and purified to near homogeneity. Whereas both PTP1D and PTP1Di had catalytic activity, the Vmax of PTP1Di relative to that of PTP1D was 8-fold lower for para-nitrophenylphosphate, 20-fold lower for nicotinic acetylcholine receptor, and 14-fold lower for myelin basic protein. The Km values of PTP1Di were lower than those of PTP1D for both nicotinic acetylcholine receptor and myelin basic protein, suggesting a higher affinity of PTP1Di for a protein substrate. These two forms also differed in optimum pH for para-nitrophenylphosphate and sensitivity to the inhibitory effects of vanadate, molybdate, and spermidine. In order to see if this insert would affect the catalytic activity of other related phosphatases, the 4-amino acids were inserted in the corresponding region of the catalytic domain of PTP1C. Whereas both the wild type and PTP1Ci which contained the 4-amino acid insert dephosphorylated para-nitrophenylphosphate, nicotinic receptor, and myelin basic protein, the enzyme activity of PTP1Ci was only 11-24% of that of PTP1C wild type. These results demonstrate that the 4-amino acid insert in the catalytic domains of PTP1D down-regulates its phosphatase activity and suggests that RNA splicing may serve as a regulatory mechanism of protein tyrosine phosphatase activity.