This study investigates the regulation of protein-tyrosine-phosphatase (PTPase; EC 188.8.131.52) activity by epidermal growth factor (EGF). Cytosol from EGF-treated A-431 human epidermoid carcinoma cells was used as a source of PTPase activity, and tyrosine-phosphorylated ErbB2, EGF receptor, phospholipase C-gamma 1, and the Ras GTPase-activating protein were used as substrates to monitor PTPase activity. EGF stimulated PTPase activity that was selective toward these substrates, as it dephosphorylated ErbB2 and the EGF receptor, but not phospholipase C-gamma 1 and the Ras GTPase-activating protein. EGF stimulated PTPase activity in several cell lines, regardless of EGF receptor number, and the activity was localized in the cytosol. The dephosphorylation activity in vitro was dependent on the presence of reducing agents and was inhibited by orthovanadate. Agonists such as phorbol 12-myristate 13-acetate, isoproterenol, or ATP were unable to stimulate PTPase activity. Physiological relevance is indicated by experiments showing that EGF treatment of a human mammary cancer cell line rapidly induced the dephosphorylation of ErbB2.