STAT5, a member of the signal transducers and activators of transcription (STATs), is important in modulating T cell functions through interleukin-2 (IL-2) receptors. Like other STAT proteins, STAT5 undergoes a rapid activation and inactivation cycle upon cytokine stimulation. Tyrosine phosphorylation and dephosphorylation are critical in regulating STAT5 activity. A number of protein tyrosine kinases have been shown to phosphorylate STAT5; however, the phosphatases responsible for STAT5 dephosphorylation remain unidentified. Using CTLL-20 as a model system, we provide evidence that tyrosine dephosphorylation of STAT5 subsequent to IL-2-induced phosphorylation occurs in the absence of STAT5 nuclear translocation and new protein synthesis. Nevertheless, down-regulation of the upstream Janus kinase activity during the deactivation cycle of IL-2-induced signaling does involve new protein synthesis. These findings point to the constitutive presence of STAT5 tyrosine phosphatase activity in the cytosolic compartment. We further demonstrate that SHP-2, but not SHP-1, directly dephosphorylates STAT5 in an in vitro tyrosine phosphatase assay with purified proteins. Furthermore, tyrosine-phosphorylated STAT5 associates with the substrate-trapping mutant (Cys --> Ser) of SHP-2 but not SHP-1. These results suggest a potential role for cytoplasmic protein-tyrosine phosphatases in directly dephosphorylating STAT proteins and in maintaining a basal steady state level of STAT activity.