The protein-tyrosine phosphatase Shp-2 is a positive modulator of the Ras/mitogen-activated protein kinase pathway and a putative substrate of the transforming non-receptor tyrosine kinase v-Src. To characterize the role of Shp-2 in cellular transformation and signaling by v-Src, we expressed v-Src in normal and Shp-2-deficient mouse embryo fibroblasts. Expression of Shp-2 was found to be necessary for morphological transformation by v-Src: Shp-2+/+ cells became rounded or spindly upon v-Src expression, whereas Shp-2-deficient cells remained relatively flat. v-Src-induced reorganization of the actin cytoskeleton and the formation of podosomes were compromised in Shp-2-deficient cells. Shp-2 deficiency also reduced v-Src-induced activation of the anti-apoptotic protein kinase Akt. The reduced activation of Akt in Shp-2-deficient cells correlated with a reduction in the association of the p85 regulatory subunit of PI3-kinase with the adapter protein Cbl. Activation of PI3-kinase by v-Src may be mediated by the association of the adapter protein Cbl with the p85 subunit. Since activation of Akt is dependent on PI3-kinase, this suggests that the effect of Shp-2 on Akt activation may be mediated, at least in part, by its effects on the interaction between PI3-kinase and Cbl. The defect in activation of the Akt survival pathway also correlated with enhanced sensitivity of Shp-2-deficient cells to an apoptosis-inducing agent. These results implicate Shp-2 in v-Src-induced cytoskeletal reorganization and activation of the Akt cell survival pathway.