We have previously shown that phosphatidylinositol (PtdIns) 3'-kinase is activated by the binding of proteins or peptides containing the phosphorylated motif Y(P)XXM. In the present study, we examine interactions between PtdIns 3'-kinase and the human insulin receptor, which contains a C-terminal phosphorylation site in the sequence Y1322THM. Partially purified insulin receptors bound tightly to bacterial fusion proteins containing the N- or C-terminal SH2 domains from PtdIns 3'-kinase regulatory subunit (p85). In contrast, a mutant insulin receptor, truncated by 43 amino acids at the C terminus (IR delta CT), bound poorly to the SH2 domains; these mutant receptors have normal kinase activity but lack the Y1322THM motif. Similarly, incubation with wild-type receptors increased the activity of immunopurified PtdIns 3'-kinase, whereas incubation with IR delta CT receptors did not affect PtdIns 3'-kinase activity. Activation of PtdIns 3'-kinase by the wild-type receptor was mimicked by a tyrosyl phosphopeptide derived from the insulin receptor C terminus and containing the Y1322THM motif; non-phosphorylated peptide did not affect activity. Thus, the insulin receptor C terminus activates PtdIns 3'-kinase in vitro by binding to the SH2 domains of the 85-kDa regulatory subunit. These data support the hypothesis that binding of tyrosyl-phosphorylated receptors to p85 SH2 domains is a general mechanism for PtdIns 3'-kinase activation, and they suggest that direct interactions between the insulin receptor and PtdIns 3'-kinase may provide an alternative pathway for the activation of this enzyme by insulin.