Protein tyrosine phosphatase (PTP) 1B plays a major role in inhibiting signaling from the insulin and leptin receptors. Recently, PTP1B was found to have an unexpected positive role in ErbB2 signaling in a mouse model of breast cancer, but the mechanism underlying this effect has been unclear. Using human breast epithelial cells grown in a three-dimensional matrix, we found that PTP1B, but not the closely related enzyme T-cell PTP, is required for ErbB2 transformation in vitro. Activation of ErbB2, but not ErbB1, increases PTP1B expression, and increased expression of PTP1B activates Src and induces a Src-dependent transformed phenotype. These findings identify a molecular mechanism by which PTP1B links an important oncogenic receptor tyrosine kinase to signaling pathways that promote aberrant cell division and survival in human breast epithelial cells. [Cancer Res 2009;69(11):4582–8]