The steady-state kinetic properties of SH-PTP1 (PTP1C, SHP, HCP), a Src homology 2 (SH2) domain-containing protein tyrosine phosphatase (PTPase), were assessed and compared with those of three truncation mutants, using p-nitrophenyl phosphate, phosphotyrosyl (pY) peptides, and reduced, carboxyamido-methylated, maleylated, and tyrosyl-phosphorylated lysozyme as substrates. At physiological pH (7.4), truncation of the two N-terminal SH2 domains [SH-PTP1(delta SH2)] or the last 35 amino acids of the C-terminus [SH-PTP1(delta C35)] activated the phosphatase activity by 30-fold and 20-34-fold relative to the wild-type enzyme, respectively. Truncation of the last 60 amino acids resulted in a mutant [SH-PTP1(delta C60)] with wild-type activity. SH-PTP1 and SH-PTP1(delta C60) displayed apparent saturation kinetics toward pNPP only at acidic pH (pH < or = 5.4); as pH increased above 5.5, their apparent KM values increased dramatically. In contrast, SH-PTP1(delta SH2) obeyed normal Michaelis-Menten kinetics at all pH values tested (pH 5.1-7.4) with a constant KM (10-14 mM). Furthermore, two synthetic pY peptides corresponding to known and potential phosphorylation sites on the erythropoietin (EPOR pY429) and interleukin-3 (IL-3R pY628) receptors bound specifically to the N-terminal SH2 domain of SH-PTP1 (KD = 1.8-10 microM) and activated the catalytic activity of SH-PTP1 and SH-PTP1(delta C60) but not SH-PTP1(delta SH2), in a concentration-dependent manner. Maximal activation (25-30-fold) of SH-PTP1 was achieved at 70 microM EPOR pY429, and the maximally activated enzyme approached the activity of SH-PTP1(delta SH2). Addition of EPOR pY429 peptide, which corresponds to the recently identified in vivo binding site for SH-PTP1, at 40 microM also completely restored the saturation kinetic behavior of SH-PTP1 (at pH 7.4) toward pNPP, with catalytic parameters (KM = 12.8 mM, kcat = 3.2 s-1) similar to those of SH-PTP1(delta SH2). These data suggest that the SH2 domains of SH-PTP1 serve to autoinhibit the phosphatase activity of the PTPase domain. A model is proposed in which the SH2 domains interact with the PTPase domain in a pY-independent fashion and drive the PTPase domain into an inactive conformation.