Inhibition of natural killer (NK) cells by the killer cell inhibitory receptor (KIR) involves recruitment of the tyrosine phosphatase SHP-1 by KIR and is prevented by expression of a dominant negative SHP-1 mutant. Another inhibitory receptor, the low affinity Fc receptor for immunoglobulin G (IgG) (Fc gamma RIIb1), has been shown to bind SHP-1 when cocross-linked with the antigen receptor on B cells (BCR). However, coligation of Fc gamma RIIb1 with BCR and with Fc epsilon RI on mast cells leads to recruitment of the inositol 5' phosphatase SHIP and to inhibition of mast cells from SHP-1-deficient mice. In this study, we evaluated the ability of these two inhibitory receptors to block target cell lysis by NK cells, and the contribution of SHP-1 and SHIP to inhibition. Recombinant vaccinia viruses encoding chimeric receptors and dominant negative mutants of SHP-1 and SHIP were used for expression in mouse and human NK cells. When the KIR cytoplasmic tail was replaced by that of Fc gamma RIIb1, recognition of HLA class I on target cells by the extracellular domain resulted in inhibition. A dominant negative mutant of SHP-1 reverted the inhibition mediated by the KIR cytoplasmic tail but not that mediated by Fc gamma RIIb1. In contrast, a dominant negative mutant of SHIP reverted only the inhibition mediated by the Fc gamma RIIb1 tail, providing functional evidence that SHIP plays a role in the Fc gamma RIIb1-mediated negative signal. These data demonstrate that inhibition of NK cells by KIR involves primarily the tyrosine phosphatase SHP-1, whereas inhibition mediated by Fc gamma RIIb1 requires the inositol phosphatase SHIP.