Protein tyrosine phosphatase receptor-type T (PTPRT) is the most frequently mutated tyrosine phosphatase in human cancers. However, the cell signaling pathways regulated by PTPRT largely remain to be elucidated. Here, we show that paxillin is a direct substrate of PTPRT and that PTPRT specifically regulates paxillin phosphorylation at tyrosine residue 88 (Y88) in colorectal cancer (CRC) cells. We engineered CRC cells homozygous for a paxillin Y88F knock-in mutant and found that these cells exhibit significantly reduced cell migration and impaired anchorage-independent growth, fail to form xenograft tumors in nude mice, and have decreased phosphorylation of p130CAS, SHP2, and AKT. PTPRT knockout mice that we generated exhibit increased levels of colonic paxillin phosphorylation at residue Y88 and are highly susceptible to carcinogen azoxymethane-induced colon tumor, providing critical in vivo evidence that PTPRT normally functions as a tumor suppressor. Moreover, similarly increased paxillin pY88 is also found as a common feature of human colon cancers. These studies reveal an important signaling pathway that plays a critical role in colorectal tumorigenesis.