The threshold at which antigen triggers lymphocyte activation is set by the enzymes that regulate tyrosine phosphorylation. Upon T cell activation, the protein tyrosine phosphatase SHP-1 was found to bind to the protein tyrosine kinase ZAP-70. This interaction resulted in an increase in SHP-1 phosphatase activity and a decrease in ZAP-70 kinase activity. Expression of a dominant negative mutant of SHP-1 in T cells increased the sensitivity of the antigen receptor. Thus, SHP-1 functions as a negative regulator of the T cell antigen receptor and in setting the threshold of activation.