We have investigated the functional role of the SH2 domain of the 85-kDa subunit (p85) of the phosphatidylinositol 3-kinase in the insulin signal transduction pathway. Microinjection of a bacterial fusion protein containing the N-terminal SH2 domain of p85 inhibited insulin- and other growth factor-induced DNA synthesis by 90% and c-fos protein expression by 80% in insulin-responsive rat fibroblasts. The specificity of the fusion protein was examined by in vitro precipitation experiments, which showed that the SH2 domain of p85 can independently associate with both insulin receptor substrate 1 and the insulin receptor itself in the absence of detectable binding to other phosphoproteins. The microinjection results were confirmed through the use of an affinity-purified antibody directed against p85, which gave the same phenotype. Additional studies were carried out in another cell line expressing mutant insulin receptors which lack the cytoplasmic tyrosine residues with which p85 interacts. Microinjection of the SH2 domain fusion protein also inhibited insulin signaling in these cells, suggesting that association of p85 with insulin receptor substrate 1 is a key element in insulin-mediated cell cycle progression. In addition, coinjection of purified p21ras protein with the p85 fusion protein or the antibody restored DNA synthesis, suggesting that ras function is either downstream or independent of p85 SH2 domain interaction.