Shp-2 is an SH2 domain-containing protein tyrosine phosphatase. Although the mechanism remains to be defined, substantial experimental data suggest that Shp-2 is primarily a positive regulator in cell growth and development. We present evidence here that Shp-2, while acting to promote mitogenic signals, also functions as a negative effector in interferon (IFN)-induced growth-inhibitory and apoptotic pathways. Treatment of mouse fibroblast cells lacking a functional Shp-2 with IFN-alpha or IFN-gamma resulted in an augmented suppression of cell viability compared to that of wild-type cells. To dissect the molecular mechanism, we examined IFN-induced activation of signal transducers and activators of transcription (STATs) by electrophoretic mobility shift assay, using a specific DNA probe (hSIE). The amounts of STAT proteins bound to hSIE upon IFN-alpha or IFN-gamma stimulation were significantly increased in Shp-2(-/-) cells. Consistently, tyrosine phosphorylation levels of Stat1 upon IFN-gamma treatment and, to a lesser extent, upon IFN-alpha stimulation were markedly elevated in mutant cells. Furthermore, IFN-gamma induced a higher level of caspase 1 expression in Shp-2(-/-) cells than in wild-type cells. Reintroduction of wild-type Shp-2 protein reversed the hypersensitivity of Shp-2(-/-) fibroblasts to the cytotoxic effect of IFN-alpha and IFN-gamma. Excessive activation of STATs by IFNs was also diminished in mutant cells in which Shp-2 had been reintroduced. Together, these results establish that Shp-2 functions as a negative regulator of the Jak/STAT pathway. We propose that Shp-2 acts to promote cell growth and survival through two mechanisms, i.e., the stimulation of growth factor-initiated mitogenic pathways and the suppression of cytotoxic effect elicited by cytokines, such as IFNs.