Cell adhesion is critical to the establishment of proper connections in the nervous system. Some receptor-type protein tyrosine phosphatases (RPTPs) have adhesion molecule-like extracellular segments with intracellular tyrosine phosphatase domains that may transduce signals in response to adhesion. PTP mu is a RPTP that mediates cell aggregation and is expressed at high levels in the nervous system. In this study, we demonstrate that PTP mu promotes neurite outgrowth of retinal ganglion cells when used as a culture substrate. In addition, PTP mu was found in a complex with N-cadherin in retinal cells. To determine the physiological significance of the association between PTP mu and N-cadherin, the expression level and enzymatic activity of PTP mu were perturbed in retinal explant cultures. Downregulation of PTP mu, expression through antisense techniques resulted in a significant decrease in neurite outgrowth on an N-cadherin substrate, whereas there was no effect on laminin or L1-dependent neurite outgrowth. The overexpression of a catalytically inactive form of PTP mu significantly decreased neurite outgrowth on N-cadherin. These data indicate that PTP mu specifically regulates signals required for neurites to extend on an N-cadherin substrate, implicating reversible tyrosine phosphorylation in the control of N-cadherin function. Together, these results suggest that PTP mu plays a dual role in the regulation of neurite outgrowth.