Src homology 2 (SH2)-domain-mediated interactions with phosphotyrosine (pY)-containing ligands are critical for the regulation of SHP-1 phosphatase activity. Peptides based on a binding site from receptor tyrosine kinase Ros (EGLN-pY2267-MVL, 1) have recently been shown to bind to the SHP-1 N-terminal SH2 domain (N-SH2) with considerably high affinity. In addition, two peptides cyclized between positions -1 and +2 relative to pY (EGLc[K(COCH(2)NH)pYMX]L-NH(2), 2: X=D, 3: X=E) bound to the N-SH2 domain, but did not activate the enzyme and even partially prevented stimulation of SHP-1 activity by the physiological ligand 1. These findings prompted us to further examine the determinants for optimal binding to the N-SH2 domain and for the stimulation and inhibition of SHP-1 activity. Herein we demonstrate that combining the preferred residues in both pY+1 (such as Phe or norleucine, Nle) and pY+3 (such as homophenylalanine, Hfe) leads to highly efficient activating ligands of SHP-1. Particularly in the context of the cyclic peptides 7 (EGLc[K(COCH(2)NH)pYFD]Hfe-NH(2)) and 8 (EGLc[K(COCH(2)NH)pYNleD]HfeL-NH(2)), the incorporation of these residues resulted in high-affinity ligands with a significantly increased ability to stimulate SHP-1 activity. We suggest that different binding modes (according to consensus sequences class I and II) are responsible for obtaining either activating (7 and 8) or nonactivating (2 and 3) ligands. Peptides such as 7 and 8 that bind in the extended fashion of the type II mode activate the phosphatase through complete filling of the cavity for pY+3. In contrast, peptides such as 2 and 3 that bind in the class I mode do not activate the enzyme because they allow more conformational space at pY+3. Therefore, their binding does not force the conformational transition necessary to trigger the dissociation of N-SH2 and the catalytic domain.