Post-translational modifications provide sensitive and flexible mechanisms to dynamically modulate protein function in response to specific signalling inputs. In the case of transcription factors, changes in phosphorylation state can influence protein stability, conformation, subcellular localization, cofactor interactions, transactivation potential and transcriptional output. Here we show that the evolutionarily conserved transcription factor Eyes absent (Eya)^, belongs to the phosphatase subgroup of the haloacid dehalogenase (HAD) superfamily^,, and propose a function for it as a non-thiol-based protein tyrosine phosphatase. Experiments performed in cultured Drosophila cells and in vitro indicate that Eyes absent has intrinsic protein tyrosine phosphatase activity and can autocatalytically dephosphorylate itself. Confirming the biological significance of this function, mutations that disrupt the phosphatase active site severely compromise the ability of Eyes absent to promote eye specification and development in Drosophila. Given the functional importance of phosphorylation-dependent modulation of transcription factor activity, this evidence for a nuclear transcriptional coactivator with intrinsic phosphatase activity suggests an unanticipated method of fine-tuning transcriptional regulation.