Regulation of cell proliferation, differentiation, and metabolic homeostasis is associated with the phosphorylation and dephosphorylation of specific tyrosine residues of key regulatory proteins. The phosphotyrosine phosphatase 1D (PTP 1D) contains two amino terminally located Src homology 2 (SH2) domains and is similar to the Drosophila corkscrew gene product, which positively regulates the torso tyrosine kinase signal transduction pathway. PTP activity was found to be regulated by physical interaction with a protein tyrosine kinase. PTP 1D did not dephosphorylate receptor tyrosine kinases, despite the fact that it associated with the epidermal growth factor receptor and chimeric receptors containing the extracellular domain of the epidermal growth factor receptor and the cytoplasmic domain of either the HER2-neu, kit-SCF, or platelet-derived growth factor beta (beta PDGF) receptors. PTP 1D was phosphorylated on tyrosine in cells overexpressing the beta PDGF receptor kinase and this tyrosine phosphorylation correlated with an enhancement of its catalytic activity. Thus, protein tyrosine kinases and phosphatases do not simply oppose each other's action; rather, they may work in concert to maintain a fine balance of effector activation needed for the regulation of cell growth and differentiation.