Several proteins that contribute to epigenetic mechanisms of gene regulation contain a characteristic motif of unknown function called the SET (Suvar3-9, Enhancer-of-zeste, Trithorax) domain. We have demonstrated that SET domains mediate highly conserved interactions with a specific family of proteins that display similarity with dual-specificity phosphatases (dsPTPases). These include myotubularin, the gene of which is mutated in a subset of patients with X-linked myotubular myopathy, and Sbf1, a newly isolated homologue of myotubularin. In contrast with myotubularin, Sbf 1 lacks a functional catalytic domain which dephosphorylates phospho-tyrosine and serine-containing peptides in vitro. Competitive interference of endogenous SET domain-dsPTPase interactions by forced expression of Sbf 1 induced oncogenic transformation of NIH 3T3 fibroblasts and impaired the in vitro differentiation of C2 myoblast cells. We conclude that myotubularin-type phosphatases link SET-domain containing components of the epigenetic regulatory machinery with signalling pathways involved in growth and differentiation.