The protein-tyrosine kinase activity of pp60c-src (c-Src) is inhibited by phosphorylation of tyr527, within the c-Src c-terminal tail. Genetic and biochemical data have suggested that this negative regulation requires an intact Src homology 2 (SH2) domain. Since SH2 domains recognize phosphotyrosine, it is possible that these two non-catalytic domains associate, and thereby repress c-Src kinase activity. Consistent with this model, an isolated Src SH2 domain expressed in bacteria as a GST fusion protein bound in vitro to a synthetic phosphotyrosine-containing peptide modeled on the C-terminal 13 residues of the c-Src tail. Binding was absolutely dependent on phosphorylation of tyr527 in the tail peptide, and was modified by both the length and sequence of the peptide. Competition experiments indicated only a moderate binding affinity between the Src SH2 domain and the phosphorylated tail. A distinct phosphotyrosine-containing peptide previously identified as binding the Src SH2 domain with high affinity stimulated c-Src tyrosine kinase activity in vitro, possibly by competing with the endogenous tail phosphorylation site for binding to the SH2 domain. Indeed, this activation was competitively inhibited by purified bacterial Src SH2 domain. These data provide direct evidence that the c-Src tail has an intrinsic affinity for the Src SH2 domain, and suggest that such an interaction in the intact molecule contributes to maintaining c-Src in an inactive form.