The deregulation of the immune response is a critical component in inflammatory disease. Recent in vitro data show that T-cell protein tyrosine phosphatase (TC-PTP) is a negative regulator of cytokine signaling. Furthermore, tc-ptp(-/-) mice display immune defects and die within 5 weeks of birth. We report here that tc-ptp(-/-) mice develop progressive systemic inflammatory disease as shown by chronic myocarditis, gastritis, nephritis, and sialadenitis as well as elevated serum interferon-gamma. The widespread mononuclear cellular infiltrates correlate with exaggerated interferon-gamma, tumor necrosis factor-alpha, interleukin-12, and nitric oxide production in vivo. Macrophages grown from tc-ptp(-/-) mice are inherently hypersensitive to lipopolysaccharide, which can also be detected in vivo as an increased susceptibility to endotoxic shock. These results identify T-cell protein tyrosine phosphatase as a key modulator of inflammatory signals and macrophage function.