The LAR family protein tyrosine phosphatases (PTPs), including LAR, PTP␦, and PTP, are transmembrane proteins composed of a cell adhesion molecule-like ectodomain and two cytoplasmic catalytic domains: active D1 and inactive D2. We performed a yeast two-hybrid screen with the first catalytic domain of PTP (PTP-D1) as bait to identify interacting regulatory proteins. Using this screen, we identified the second catalytic domain of PTP␦ (PTP␦-D2) as an interactor of PTP-D1. Both yeast two-hybrid binding assays and coprecipitation from mammalian cells revealed strong binding between PTP-D1 and PTP␦-D2, an association which required the presence of the wedge sequence in PTP-D1, a sequence recently shown to mediate D1-D1 homodimerization in the phosphatase RPTP␣. This interaction was not reciprocal, as PTP␦-D1 did not bind PTP-D2. Addition of a glutathione S-transferase (GST)-PTP␦-D2 fusion protein (but not GST alone) to GST-PTP-D1 led to ϳ50% inhibition of the catalytic activity of PTP-D1, as determined by an in vitro phosphatase assay against p-nitrophenylphosphate. A similar inhibition of PTP-D1 activity was obtained with coimmunoprecipitated PTP␦-D2. Interestingly, the second catalytic domains of LAR (LAR-D2) and PTP (PTP-D2), very similar in sequence to PTP␦-D2, bound poorly to PTP-D1. PTP␦-D1 and LAR-D1 were also able to bind PTP␦-D2, but more weakly than PTP-D1, with a binding hierarchy of PTP-D1>>PTP␦-D1> LAR-D1. These results suggest that association between PTP-D1 and PTP␦-D2, possibly via receptor heterodimerization, provides a negative regulatory function and that the second catalytic domains of this and likely other receptor PTPs, which are often inactive, may function instead to regulate the activity of the first catalytic domains.Tyrosine phosphorylation, controlled by the activity of protein tyrosine kinases (PTKs) and protein tyrosine phosphatases (PTPs), plays a critical role in the regulation of many cellular processes, including cell proliferation and differentiation. PTPs, like PTKs, can be classified into cytosolic and receptortype PTPs (11,25). One subclass of receptor PTPs (RPTPs) is represented by the LAR family of phosphatases, which includes LAR and Drosophila DLAR (37, 39), PTP␦ (20,23,29), PTP (also known as LAR-PTP2, PTP-P1, CRYP␣, PTP-NU3, and CPTP1 [27,30,34,44,45,49,52] and referred to herein as PTP), and the three related phosphatases PTP, PTP, and PTP (6,12,16). These PTPs are characterized by an extracellular domain composed of multiple immunoglobulin (Ig)-like and fibronectin type III (FNIII) repeats, resembling cell adhesion molecules (CAM) such as N-CAM and L1 (7, 24) and several receptor PTKs. The CAM-like ectodomain can also be expressed alone, due to either alternative splicing or ectodomain shedding, thus disconnecting it from the intracellular catalytic domains (16,26,36). Like most RPTPs, the LAR family phosphatases contain a single transmembrane domain and two tandemly repeated catalytic domains (D1 and D2). Mutation of the highly conserved Cys in LAR-D1 abrogates PTP cat...