The proline‐, glutamic acid‐, serine‐ and threonine‐enriched protein tyrosine phosphatase PEP, which is expressed primarily in hematopoietic cells, was recently discovered to be physically associated with the 50‐kDa cytosolic protein tyrosine kinase (PTK) Csk, an important suppressor of Src family PTK, including Lck and Fyn in T cells. We report that this phosphatase has an inhibitory effect on TCR‐induced transcriptional activation of the c‐fos proto‐oncogene and elements from the IL‐2 gene promoter. Catalytically inactive mutants of PEP had no effects in these assays. Expression of PEP also reduced activation of the N‐terminal c‐Jun kinase Jnk2 in response to receptor ligation, but not in response to UV light. In agreement with a more receptor‐proximal site of action, we found that PEP reduced the TCR‐induced increase in tyrosine phosphorylation of an Lck mutant, Lck‐Y505F, which is only phosphorylated on tyrosine 394, the positive regulatory site. Finally, we observed that PEP reduced c‐fos activation in a synergistic manner with Csk, supporting the notion that these two enzymes form a functional team acting on Src family kinases involved in TCR signaling.