The association of PTP1C deficiency with the multiplicity of lymphoid cell abnormalities manifested by motheaten (me) and viable motheaten (me(v)) mice suggests a pivotal role for this tyrosine phosphatase in the regulation of lymphocyte differentiation and function. To delineate the relevance of PTP1C to T cell physiology, we have examined me and me(v) T cells with regards to their capacity to transduce activating signals through the T cell antigen receptor (TCR). Although thymocyte maturation appeared normal in the mutant mice, both thymocytes and peripheral T cells from these animals exhibited proliferative response to TCR stimulation that were markedly increased relative to those elicited in normal cells. Compared to normal thymocytes, PTP1C-deficient thymocytes also showed increased constitutive tyrosine phosphorylation of the TCR complex and enhanced and prolonged TCR-induced tyrosine phosphorylation of the TCR-zeta and CD3-epsilon, as well as a number of cytosolic proteins, most notably a 38-kD phosphoprotein found to associate with the Grb2 adaptor SH2 domain in activated thymocytes. These latter phosphoproteins also associated with the Vav guanine nucleotide exchange factor upon TCR ligation, and were dephosphorylated by recombinant PTP1C in vitro. In conjunction with the finding of PTP1C-TCR association in unstimulated normal thymocytes, these results reveal the capacity of PTP1C to interact with and likely dephosphorylate resting and activated TCR complex components, as well as more distal signaling effectors that are normally recruited to the Vav and Grb2 SH2 domains after TCR stimulation. These data therefore strongly implicate PTP1C in the downregulation of TCR signaling capacity and, taken together with the aberrant prolongation of TCR-induced, mitogen-associated kinase (MAPK) activation observed in PTP1C-deficient thymocytes, these findings suggest that the inhibitory influence of PTP1C on TCR signal relay is realized through its effects on both the TCR complex and downstream signaling elements that couple the activated antigen receptor to the Ras/MAPK response pathway.