Protein tyrosine phosphatases (PTPs) are key mediators that link physiological cues with reversible changes in protein structure and function; nevertheless, significant details concerning their regulation in vivo remain unknown. We demonstrate that PTPepsilon associates with microtubules in vivo and is inhibited by them in a noncompetitive manner. Microtubule-associated proteins, which interact strongly with microtubules in vivo, significantly increase binding of PTPepsilon to tubulin in vitro and further reduce phosphatase activity. Conversely, disruption of microtubule structures in cells reduces their association with PTPepsilon, alters the subcellular localization of the phosphatase, and increases its specific activity. Activation of the epidermal growth factor receptor (EGFR) increases the PTPepsilon-microtubule association in a manner dependent upon EGFR-induced phosphorylation of PTPepsilon at Y638 and upon microtubule integrity. These events are transient and occur with rapid kinetics similar to EGFR autophosphorylation, suggesting that activation of the EGFR transiently down-regulates PTPepsilon activity near the receptor by promoting the PTPepsilon-microtubule association. Tubulin also inhibits the tyrosine phosphatase PTP1B but not receptor-type PTPmu or the unrelated alkaline phosphatase. The data suggest that reversible association with microtubules is a novel, physiologically regulated mechanism for regulation of tyrosine phosphatase activity in cells.