Protein tyrosine phosphatase 1B (PTP-1B) is a ubiquitously expressed cytosolic phosphatase with the ability to dephosphorylate JAK2 and TYK2, and thereby down-regulate cytokine receptor signaling. Furthermore, PTP-1B levels are up-regulated in certain chronic myelogenous leukemia patients, which points to a potential role for PTP-1B in myeloid development. The results presented here show that the absence of PTP-1B affects murine myelopoiesis by modifying the ratio of monocytes to granulocytes in vivo. This bias toward monocytic development is at least in part due to a decreased threshold of response to CSF-1, because the PTP-1B -/- bone marrow presents no abnormalities at the granulocyte-monocyte progenitor level but produces significantly more monocytic colonies in the presence of CSF-1. This phenomenon is not due to an increase in receptor levels but rather to enhanced phosphorylation of the activation loop tyrosine. PTP-1B -/- cells display increased inflammatory activity in vitro and in vivo through the constitutive up-regulation of activation markers as well as increased sensitivity to endotoxin. Collectively, our data indicate that PTP-1B is an important modulator of myeloid differentiation and macrophage activation in vivo and provide a demonstration of a physiological role for PTP-1B in immune regulation.