Mitogen-activated protein (MAP) kinase phosphatase 3 (MKP3) is a cytoplasmic dual specificity phosphatase that functions to attenuate signaling via dephosphorylation and subsequent deactivation of its substrate and allosteric regulator, extracellular signal-regulated protein kinase 2 (ERK2). Expression of MKP3 has been shown to be under the control of ERK2, thus providing an elegant feedback mechanism for regulating the rate and duration of proliferative signals. Previously published studies suggest that MKP3 might serve as a tumor suppressor; however, significantly elevated, rather than reduced, levels of this protein have been reported in early lesions. Because overexpression of this phosphatase is counterintuitive to a proposed tumor suppressor function, the observed cellular tolerance suggested a self-inactivation mechanism. Using surface plasmon resonance, we have provided direct evidence of physical interaction between the N- and C-terminal domains. Kinetic analysis using dimethyl sulfoxide to activate the C-terminal fragment in the absence of ERK2 showed that the isolated C-terminal domain had higher catalytic efficiency than the similarly activated full-length protein. Furthermore, when the isolated N-terminal domain was added to the activated C-terminal domain, a dose-dependant inhibition of catalytic activity was observed. The similarity between the K(I) and K(D) values obtained indicate that interdomain binding stabilizes the inactive conformation of the catalytic site and implies that the N-terminal domain functions as an allosteric inhibitor of phosphatase activity. Finally, we have provided evidence for oligomerization of MKP3 in pancreatic cancer cells expressing elevated levels of this phosphatase.