To explore the role of the protein tyrosine phosphatase Syp in insulin signaling, a catalytically inert mutant Syp protein was expressed under an inducible promoter in cells transfected with the human insulin receptor. Expression of the mutant phosphatase significantly reduced the stimulation of mitogenesis by insulin, indicating that the mutation produced a dominant negative phenotype. Tyrosine phosphorylation of both the insulin receptor and its major substrates, Shc and insulin receptor substrate-1, were unaffected by the mutant phosphatase. However, both the insulin-dependent tyrosine phosphorylation and activation of mitogen-activated protein kinase were markedly attenuated. Expression of the mutant phosphatase allowed the detection of a 120-kDa protein phosphorylated in response to insulin that associated with the src homology (SH) 2 domains of the phosphatase, suggesting a possible regulatory role for this protein. These results indicate that the activity of Syp plays a critical part in the mitogenic actions of insulin.