We have studied the effect of insulin stimulation on phosphotyrosine phosphatase (PTPase) activity in the well-differentiated rat hepatoma cell line Fao. PTPase activity was measured using a 32P-labeled peptide corresponding to the major site of insulin receptor autophosphorylation. Of the PTPase activity in Fao cells, 14% was in the cytosolic fraction, whereas 86% was in the particulate fraction; this latter fraction also had a 4-fold higher specific activity. Purification of the particulate fraction by lectin chromatography resulted in a 50% increase in specific activity, although this glycoprotein-rich fraction contained only 1.5% of the total activity. Both the cytosolic and particulate PTPase fractions were active toward the tyrosyl-phosphorylated insulin receptor in vitro. The activity of the particulate fraction but not the cytosolic fraction was inhibited by addition of a micromolar concentration of a phosphorylated peptide corresponding to residues 1142-1153 of the human insulin receptor sequence. By contrast, addition of the nonphosphorylated peptide even at millimolar concentration was without effect. Both PTPase fractions were inhibited by Zn+ at similar concentrations, whereas the cytosolic PTPase activity was 10-fold more sensitive to vanadate inhibition. Treatment of cells with 100 nM insulin increased PTPase activity in the particulate fraction by 40% and decreased activity in the cytosolic fraction by 35%. These effects occurred within 15 min and were half-maximal at 3-4 nM insulin. When assessed as total activity, the magnitude of the changes in PTPase activity in the particulate and cytosolic fractions could not be explained on the basis of a translocation of PTPases between the two pools.(ABSTRACT TRUNCATED AT 250 WORDS)