Endothelial cells approaching confluence exhibit marked decreases in tyrosine phosphorylation of receptor tyrosine kinases and adherens junctions proteins, required for cell cycle arrest and adherens junctions stability. Recently, we demonstrated a close correlation in endothelial cells between membrane cholesterol and tyrosine phosphorylation of adherens junctions proteins. Here, we probe the mechanistic basis for this correlation. We find that as endothelial cells reach confluence, the tyrosine phosphatase SHP-2 is recruited to a low-density membrane fraction in a cholesterol-dependent manner. Binding of SHP-2 to this fraction was not abolished by phenyl phosphate, strongly suggesting that this binding was mediated by other regions of SHP-2 beside its SH2 domains. Annexin II, previously implicated in cholesterol trafficking, was associated in a complex with SHP-2, and both proteins localized to adhesion bands in confluent endothelial monolayers. These studies reveal a novel, cholesterol-dependent mechanism for the recruitment of signaling proteins to specific plasma membrane domains via their interactions with annexin II.Endothelial cells approaching confluence in culture undergo profound morphological and functional alterations, including the formation of intercellular junctions and the cessation of cell growth. These changes are associated with reductions in tyrosine phosphorylation levels of both receptor tyrosine kinases (1, 2) and cadherins and catenins (3), the major components of adherens junctions. The dephosphorylation of adherens junctions proteins appears to be necessary for the formation of stable, confluent endothelial monolayers, since increased tyrosine phosphorylation of adherens junctions proteins leads to the disruption of adherens junctions (4 -6). The mechanisms by which cell density decreases tyrosine phosphorylation of endothelial membrane proteins are unknown.One possible mechanism is that increased cell confluence modulates the local environment of signaling proteins in the plasma membrane, thereby altering their response to extracellular ligands. Recently (7), we identified membrane cholesterol as a potential determinant of tyrosine phosphorylation levels in growing endothelial monolayers. Membrane cholesterol increased markedly with cell density in cultures of growing endothelial cells, exhibiting levels 3-4-fold higher upon reaching confluence. Depletion of cholesterol from confluent monolayers of CPAE 1 cells induced the tyrosine phosphorylation of multiple membrane proteins, including the adherens junctions proteins ␥-catenin and pp120, and disrupted adherens junctions.Cholesterol might regulate tyrosine phosphorylation levels through the localization of tyrosine kinases or phosphatases to specific plasma membrane loci. To begin to identify such kinases or phosphatases, we have used very low (0.01%) levels of the sterol-containing detergent digitonin to identify proteins bound to membranes in a cholesterol-dependent manner (8). At these concentrations, digitonin complexes specifica...