The Src homology 2 phosphotyrosyl phosphatase (SHP2) is a nonreceptor-type phosphatase that acts as a positive transducer of receptor Tyr kinase (RTK) signaling, particularly the Ras-REK and PI3K-Akt pathways. Recently, we have demonstrated that SHP2 is required for cell transformation induced by the constitutively active fibroblast growth factor receptor 3 (K/E-FR3) (Oncogene, 22,(6909)(6910)(6911)(6912)(6913)(6914)(6915)(6916)(6917)(6918). In that study, we had detected a phosphotyrosyl protein of B100 KDa (p100) in cells expressing dominant-negative SHP2 (R/E-SHP2), but its identity and relevance in SHP2-meditaed transformation was not known. Here, we report the identification of p100 as a-catenin, a vinculin-related protein involved in adherens junction-mediated intercellular adhesion. We show that a-catenin becomes Tyr phosphorylated in intercellular adhesion-dependent manner and this event is counteracted by SHP2. Substrate trapping in intact cells and immunocomplex phosphatse assays confirmed that a-catenin is in deed an SHP2 substrate. Tyr phosphorylation of a-catenin enhances its translocation to the plasma membrane and its interaction with bcatenin, leading to enhanced actin polymerization and stabilization of adherens junction-mediated intercellular adhesion, a phenomenon commensurate with loss of the transformation phenotype. Site-directed mutagenesis studies also suggested that Tyr phosphorylation of a-catenin enhances its inhibitory role on cell transformation. Based on our previous work and the current report, we demonstrate that mediation of cell transformation by SHP2 is a complex process that involves modulation of the Ras-ERK and PI3K-Akt signaling pathways, intercellular adhesion, focal adhesion and actin cytoskeletal reorganization. To our knowledge, this is the first report showing regulation of a-catenin function by Tyr phosphorylation and its inhibitory effect on cell transformation.