Low M(r) phosphotyrosine-protein phosphatase belongs to the non-receptor cytosolic phosphotyrosine-protein phosphatase subfamily. It has been demonstrated that this enzyme dephosphorylates receptor tyrosine kinases, namely the epidermal growth factor receptor in vitro and the platelet-derived growth factor receptor in vivo. Low M(r) phosphotyrosine-protein phosphatase is constitutively tyrosine-phosphorylated in NIH/3T3 cells transformed by pp60v-src. The same tyrosine kinase, previously immunoprecipitated, phosphorylates this enzyme in vitro as well. Phosphorylation is enhanced using phosphatase inhibitors and phenylarsine oxide-inactivated phosphatase, consistently with the existence of an auto-dephosphorylation process. Intermolecular dephosphorylation is demonstrated adding the active enzyme in a solution containing the inactivated and previously phosphorylated one. This tyrosine phosphorylation correlates with an increase in catalytic activity. Our results provide evidence of a physiological mechanism of low M(r) phosphotyrosine-protein phosphatase activity regulation.