The inositol phosphatase SHIP binds to the FcgammaRIIB1 receptor and plays a critical role in FcgammaRIIB1-mediated inhibition of B-cell proliferation and immunoglobulin synthesis. The molecular details of SHIP function are not fully understood. While point mutations of the signature motifs in the inositol phosphatase domain abolish SHIP's ability to inhibit calcium flux in B cells, little is known about the function of the evolutionarily conserved, putative noncatalytic regions of SHIP in vivo. In this study, through a systematic mutagenesis approach, we identified the inositol phosphatase domain of SHIP between amino acids 400 and 866. Through reconstitution of a SHIP-deficient B-cell line with wild-type and mutant forms of SHIP, we demonstrate that the catalytic domain alone is not sufficient to mediate FcgammaRIIB1/SHIP-dependent inhibition of B-cell receptor signaling. Expression of a truncation mutant of SHIP that has intact phosphatase activity but lacks the last 190 amino acids showed that the noncatalytic region in the C terminus is essential for inhibitory signaling. Mutation of two tyrosines within this C-terminal region, previously identified as important in binding to Shc, showed a reduced inhibition of calcium flux. However, studies with an Shc-deficient B-cell line indicated that Shc-SHIP complex formation is not required and that other proteins that bind these tyrosines may be important in FcgammaRIIB1/SHIP-mediated calcium inhibition. Interestingly, membrane targeting of SHIP lacking the C terminus is able to restore this inhibition, suggesting a role for the C terminus in localization or stabilization of SHIP interaction at the membrane. Taken together, these data suggest that the noncatalytic carboxyl-terminal 190 amino acids of SHIP play a critical role in SHIP function in B cells and may play a similar role in several other receptor systems where SHIP functions as a negative regulator.