Protein tyrosine phosphorylation is a major regulator of bone metabolism. Tyrosine phosphatases participate in regulating phosphorylation, but roles of specific phosphatases in bone metabolism are largely unknown. We demonstrate that young (<12 weeks) female mice lacking tyrosine phosphatase epsilon (PTPepsilon) exhibit increased trabecular bone mass due to cell-specific defects in osteoclast function. These defects are manifested in vivo as reduced association of osteoclasts with bone and as reduced serum concentration of C-terminal collagen telopeptides, specific products of osteoclast-mediated bone degradation. Osteoclast-like cells are generated readily from PTPepsilon-deficient bone-marrow precursors. However, cultures of these cells contain few mature, polarized cells and perform poorly in bone resorption assays in vitro. Podosomes, structures by which osteoclasts adhere to matrix, are disorganized and tend to form large clusters in these cells, suggesting that lack of PTPepsilon adversely affects podosomal arrangement in the final stages of osteoclast polarization. The gender and age specificities of the bone phenotype suggest that it is modulated by hormonal status, despite normal serum levels of estrogen and progesterone in affected mice. Stimulation of bone resorption by RANKL and, surprisingly, Src activity and Pyk2 phosphorylation are normal in PTPepsilon-deficient osteoclasts, indicating that loss of PTPepsilon does not cause widespread disruption of these signaling pathways. These results establish PTPepsilon as a phosphatase required for optimal structure, subcellular organization, and function of osteoclasts in vivo and in vitro.