The protein-tyrosine phosphatase Shp2 plays an essential role in growth factor and integrin signaling, and Shp2 mutations cause developmental defects and/or malignancy. Previous work has placed Shp2 upstream of Ras. However, the mechanism of Shp2 action and its substrate(s) are poorly defined. Additional Shp2 functions downstream of, or parallel to, Ras/Erk activation also are proposed. Here, we show that Shp2 promotes Src family kinase (SFK) activation by regulating the phosphorylation of the Csk regulator PAG/Cbp, thereby controlling Csk access to SFKs. In Shp2-deficient cells, SFK inhibitory C-terminal tyrosines are hyperphosphorylated, and the tyrosyl phosphorylation of multiple SFK substrates, including Plcγ1, is decreased. Decreased Plcγ1 phosphorylation leads to defective Ras activation on endomembranes, and may help account for impaired Erk activation in Shp2-deficient cells. Decreased phosphorylation/activation of other SFK substrates may explain additional consequences of Shp2 deficiency, including altered cell spreading, stress fibers, focal adhesions, and motility.