The proliferative action of insulin-like growth factors (IGF-I and -II) is mediated via the type I IGF receptor (IGF-IR) and is modulated by their association with high affinity binding proteins, IGFBP-1 to -6. We recently found that, in addition to its ability to bind IGFs, IGFBP-3 also inhibits IGF-IR activation independently of IGF binding and without interacting directly with IGF-IR. Here, we show that IGFBP-3 is capable of blocking the signal triggered by IGFs. Breast carcinoma-derived cells (MCF-7) were stimulated by des(1-3)IGF-I or [Gln(3),Ala(4),Tyr(15),Leu(16)]IGF-I, two IGF analogues with intact affinity for IGF-IR, but with weak or virtually no affinity for IGFBPs, then incubated with IGFBP-3. The activated IGF-IR was desensitized through reversal of its autophosphorylation, following which both phosphatidylinositol 3-kinase and p42(MAPK) activities were depressed. Direct measurement of phosphotyrosine phosphatase activity and reconstitution experiments using tyrosine-phosphorylated insulin receptor substrate-1 (IRS-1) indicated that IGFBP-3 activated a phosphotyrosine phosphatase (PTPase). This action appeared to be peculiar to IGFBP-3 among the IGFBPs, since neither IGFBP-1 nor IGFBP-5 (structurally the closest to IGFBP-3), had any such effect. Several cell lines derived from normal or tumor cells responsive to IGF-I were used to show that IGFBP-3-stimulated PTPase is cell type-specific. Although the precise nature of the phosphatase remains to be determined, the results of this study demonstrate that IGFBP-3 stimulates a phosphotyrosine phosphatase activity that down-regulates the IGF-I signaling pathway, suggesting a major role for IGFBP-3 in regulating cell proliferation.