The low molecular weight protein-tyrosine phosphatase (low M(r) PTPase) is an 18-kDa cytoplasmic enzyme of unknown function that has been previously found in several vertebrates. Using an oligonucleotide probe derived from the active site sequence of the mammalian low M(r) PTPases, a Saccharomyces cerevisiae gene that encodes a homolog of this enzyme was cloned by low stringency hybridization. This gene, LTP1, together with a neighboring gene, TKL1, is shown to be located on the right arm of chromosome XVI. The deduced amino acid sequence of its 161-amino acid residue product shows a 39% average identity with that of the mammalian enzymes. The yeast Ltp1 protein was expressed in Escherichia coli, purified to homogeneity, and shown to possess PTPase activity. The recombinant Ltp1 efficiently hydrolyzes phosphotyrosine and a phosphotyrosine-containing peptide, Tyr531-fyn, but it shows low activity toward phosphoserine and phosphothreonine. The catalytic activity of Ltp1 toward a number of substrates was approximately 30-fold lower than the corresponding values measured for the bovine low M(r) PTPase. However, the yeast enzyme was markedly activated by adenine and some purine nucleosides and nucleotides, including cAMP and cGMP. In the case of adenine, the activity of Ltp1 was increased by approximately 30-fold. The high degree of evolutionary conservation of the low M(r) PTPases implies a significant role for this enzyme. However, neither the disruption of the LTP1 gene nor an approximately 10-fold overexpression of its product in S. cerevisiae caused any apparent phenotypic changes under the conditions tested. No proteins related to Ltp1 could be detected in extracts of the ltp1 null mutant, either by immunoblotting or by gel-filtration analysis accompanied by extended kinetic assays, consistent with the conclusion that LTP1 is the only low M(r) PTPase-encoding gene in S. cerevisiae.