A gain-of-function R620W polymorphism in the PTPN22 gene, encoding the lymphoid tyrosine phosphatase LYP, has recently emerged as an important risk factor for human autoimmunity. Here we report that another missense substitution (R263Q) within the catalytic domain of LYP leads to reduced phosphatase activity. High-resolution structural analysis revealed the molecular basis for this loss of function. Furthermore, the Q263 variant conferred protection against human systemic lupus erythematosus, reinforcing the proposal that inhibition of LYP activity could be beneficial in human autoimmunity.