Low phosphotyrosine-protein phosphatase is involved in the regulation of several tyrosine kinase growth factor receptors. The best characterized action of this enzyme is on the signaling pathways activated by platelet-derived growth factor, where it plays multiple roles. In this study we identify tyrosine-phosphorylated caveolin as a new potential substrate for low M-r phosphotyrosine-protein phosphatase. Caveolin is tyrosine-phosphorylated in vivo by Src kinases, recruits into caveolae, and hence regulates the activities of several proteins involved in cellular signaling cascades. Our results demonstrate that caveolin and low M-r phosphotyrosine-protein phosphatase coimmunoprecipitate from cell lysates, and that a fraction of the enzyme localizes in caveolae. Furthermore, in a cell line sensitive to insulin, the overexpression of the C12S dominant negative mutant of low M-r phosphotyrosine-protein phosphatase (a form lacking activity but able to bind substrates) causes the enhancement of tyrosine-phosphorylated caveolin. Insulin stimulation of these cells induces a strong increase of caveolin phosphorylation. The localization of low M-r phosphotyrosine-protein phosphatase in caveolae, the in vivo interaction between this enzyme and caveolin, and the capacity of this enzyme to rapidly dephosphorylate phosphocaveolin, all indicate that tyrosine-phosphorylated caveolin is a relevant substrate for this phosphatase.