SH-PTP2, the vertebrate homolog of Drosophila cork. screw, associates with several activated growth factor receptors, but its biological function is unknown. We assayed the effects of injection of wild-type and mutant SH-PTP2 RNAs on Xenopus embryogenesis. An internal phosphatase domain deletion (AP) acts as a dominant negative mutant, causing severe posterior truncations. This phenotype is rescued by SH-PTP2, but not by the closely related SH-PTP1. In ectodermal explants, AP blocks fibroblast growth factor (FGF)-and activin-mediated induction of mesoderm and FGF-induced mitogen-activated protein (MAP) kinase activation. Our results indicate that SH-PTP2 is required for early vertebrate development, acting as a positive component in FGF signaling downstream of the FGF receptor and upstream of MAP kinase.