Src homology 2 (SH2) domains on the regulatory subunit of phosphoinositide 3-kinase (PI 3-kinase) mediate its binding to specific tyrosine-phosphorylated proteins in stimulated cells. Using a pharmacological and genetic approach, we show that the amount of PI 3-kinase associated with tyrosine-phosphorylated proteins inversely correlates with the amount of PI 3-kinase lipid products present in the cell. An explanation for this observation is provided by our finding that phosphatidylinositol (3,4,5)trisphosphate (Ptdlns [3,4,5]P3) binds directly and selectively to the SH2 domains of the 85 kDa subunit of PI 3-kinase and thereby blocks binding to tyrosine-phosphorylated proteins. The SH2 domain of pp60C-STC also specifically bound Ptdlns (3,4,5)P3, and the binding was competed by a phosphopeptide specific for the Src SH2 domain. These results indicate that production of Ptdlns (3,4,5)P3 at the membrane disrupts the binding of PI 3-kinase to phosphoproteins. This lipid may also recruit other SH2-containing proteins to the membrane to initiate downstream signaling.