Interleukin 2 (IL-2) rapidly induces tyrosine phosphorylation of intracellular substrates, including the IL-2 receptor β chain (IL-2Rβ), Janus kinase 1 (Jak1), Jak3, signal transducer/activator of transcription proteins, and Shc, but the mechanism underlying dephosphorylation of these proteins is not known. The src homology 2 (SH2) containing tyrosine phosphatase 1 (SHP-1) is recruited by several hematopoietic surface receptors indicating that this phosphatase plays an important role as a regulator of signaling. We have found that IL-2 induces association of SHP-1 with the IL-2 receptor complex, and that once SHP-1 is recruited to the activated receptor it is able to decrease tyrosine phosphorylation of IL-2Rβ and the associated tyrosine kinases Jak1 and Jak3. This dephosphorylation is specific as expression of a catalytically inactive form of SHP-1, or expression of the related phosphatase SHP-2 did not result in dephosphorylation of the IL-2 receptor components. Furthermore, we have found that SHP-1 expression is greatly decreased or undetectable in a number of IL-2 independent HTLV-I transformed T cell lines that exhibit constitutive Jak/signal transducer/activator of transcription activation. In HTLV-I infected T cells, down-regulation of SHP-1 expression was also found to correlate with the acquisition of IL-2 independence. These observations suggest that SHP-1 normally functions to antagonize the IL-2 signal transduction pathway and that HTLV-I infection and oncogenic transformation can lead to loss of SHP-1 expression resulting in constitutive activation of IL-2 regulated T cell responses.