Leukocyte-associated Ig-like receptor (LAIR)-1 is an inhibitory receptor expressed on most human leukocytes. It contains two immunoreceptor tyrosine-based inhibitory motifs (ITIM) in its cytoplasmic tail and recruits phosphatases upon phosphorylation. Here we show that both ITIM are required for full inhibition of cellular responses and optimal phosphatase recruitment. Mutation of the C-terminal ITIM still allows partial inhibition of the cytotoxic activity of the NK-like YT.2C2 cells, while mutation of the N-terminal ITIM completely abolishes this inhibitory activity. In contrast, in rat basophilic leukemia (RBL) cells, both mutants of LAIR-1 are partially effective. This is reflected in phosphorylation of these mutants in the different cell types upon pervanadate treatment. However, in both YT.2C2 cells and RBL cells, only the mutant containing the N-terminal ITIM recruits Src homology 2 domain-containing tyrosine phosphatase-2 (SHP-2), while the mutant containing the C-terminal ITIM does not. In RBL cells the mutant containing only the N-terminal ITIM also binds SHP-1, although to a lesser extent than wild-type LAIR-1. We find that in Jurkat T cells Lck is required for the association of SHP-1 with LAIR-1. Co-expression with Lck in 293T cells leads to phosphorylation of both wild-type LAIR-1 and the mutant containing only the N-terminal ITIM, while the mutant lacking this ITIM is not phosphorylated. These results indicate that Lck, or another Src family kinase, is essential for the consecutive phosphorylation of the N- and C-terminal ITIM. Our data imply that the N-terminal ITIM is dominant in LAIR-1 signaling, but that both ITIM contribute to an optimal inhibitory function.