The Tec family of protein-tyrosine kinases (PTKs), that includes Tec, Itk, Btk, Bmx, and Txk, plays an essential role in phospholipase Cgamma (PLCgamma) activation following antigen receptor stimulation. This function requires activation of phosphatidylinositol 3-kinase (PI 3-kinase), which promotes Tec membrane localization through phosphatidylinositol 3,4,5-trisphosphate (PtdIns 3,4,5-P(3)) generation. The mechanism of negative regulation of Tec family PTKs is poorly understood. In this study, we show that the inositol 5' phosphatases SHIP1 and SHIP2 interact preferentially with Tec, compared with other Tec family members. Four lines of evidence suggest that SHIP phosphatases are negative regulators of Tec. First, SHIP1 and SHIP2 are potent inhibitors of Tec activity. Second, inactivation of the Tec SH3 domain, which is necessary and sufficient for SHIP binding, generates a hyperactive form of Tec. Third, SHIP1 inhibits Tec membrane localization. Finally, constitutively targeting Tec to the membrane relieves SHIP1-mediated inhibition. These data suggest that SHIP phosphatases can interact with and functionally inactivate Tec by de-phosphorylation of local PtdIns 3,4,5-P(3) and inhibition of Tec membrane localization.