Receptor protein-tyrosine phosphatase RPTPalpha is found associated in vivo with the adaptor protein Grb2. Formation of this complex, which contains no detectable levels of Sos, is known to depend on a C-terminal phosphorylated tyrosine residue (Tyr798) in RPTPalpha and on the Src homology (SH) 2 domain in Grb2 (, ). We show here that association of Grb2 with RPTPalpha also involves a critical function for the C-terminal SH3 domain of Grb2. Furthermore, Grb2 SH3 binding peptides interfere with RPTPalpha-Grb2 association in vitro, and the RPTPalpha protein can dissociate the Grb2-Sos complex in vivo. These observations constitute a novel mode of Grb2 association and suggest a model in which association with a tyrosine-phosphorylated protein restricts the repertoire of SH3 binding proteins with which Grb2 can simultaneously interact. The function of the Tyr798 tyrosine phosphorylation/Grb2 binding site in RPTPalpha was studied further by expression of wild type or mutant RPTPalpha proteins in PC12 cells. In these cells, wild type RPTPalpha interferes with acidic fibroblast growth factor-induced neurite outgrowth; this effect requires both the catalytic activity and the Grb2 binding Tyr798 residue in RPTPalpha. In contrast, expression of catalytically active RPTPalpha containing a mutated tyrosine phosphorylation/Grb2 association site enhances neurite outgrowth. Our observations associate a functional effect with tyrosine phosphorylation of, and ensuing association of signaling proteins with, a receptor protein-tyrosine phosphatase and raise the possibility that RPTPalpha association may modulate Grb2 function and vice versa.