It has long been postulated that protein tyrosine phosphatases may act as tumor suppressors because of their ability to counteract the oncogenic actions of protein tyrosine kinases. Here we report the cloning and characterization of a novel human protein tyrosine phosphatase, TEP1. TEP1 contains the protein tyrosine phosphatase signature motif, and we show that it possesses an intrinsic protein tyrosine phosphatase activity. TEP1 also shares extensive homology with tensin, a cytoskeletal protein localized to focal adhesions, and with auxilin, a protein involved in synaptic vesicle transport. Immunofluorescence studies show that TEP1 is a cytoplasmic protein. The abundance of TEP1 transcription is altered in many transformed cells. In the transforming growth factor beta-sensitive cells, TEP1 expression is rapidly down-regulated by transforming growth factor beta, a cytokine shown to be involved in regulating cell adhesion and cell motility. We have also mapped the gene encoding TEP1 to chromosome 10q23, a locus that is frequently deleted in a variety of human cancers. TEP1 protein is identical to the protein encoded by the candidate tumor suppressor gene PTEN/MMAC1. Our functional studies of the TEP1 protein suggest that its tumor suppressor function may associate with its intrinsic protein tyrosine phosphatase activity and its cytoplasmic localization.