Interferons (IFNs) induce early response genes by stimulating Janus family (Jak) tyrosine kinases, leading to tyrosine phosphorylation of Stat (signal transducer and activator of transcription) proteins. Previous studies demonstrated that a protein-tyrosine phosphatase (PTP) is required for activation of the ISGF3 transcription complex by IFN alpha/beta, but the specific PTP responsible remained unidentified. We now show that the SH2 domain containing tyrosine phosphatase PTP1D (also designated as SHPTP2, SHPTP3, PTP2C, or Syp) is constitutively associated with the IFN alpha/beta receptor and becomes tyrosine-phosphorylated in response to ligand. Furthermore, transient expression of a phosphatase-inactive mutant or the COOH-terminal SH2 domain of PTP1D causes a dominant negative effect on IFN alpha/beta-induced early response gene expression. These results provide strong evidence that PTP1D functions as a positive regulator of the IFN alpha/beta-induced Jak/Stat signal transduction pathway.