CTLA-4, a negative regulator of T cell function, was found to associate with the T cell receptor (TCR) complex zeta chain in primary T cells, The association of TCR zeta with CTLA-4, reconstituted in 293 transfectants, was enhanced by p56(lck)-induced tyrosine phosphorylation. Coexpression of the CTLA-4-associated tyrosine phosphatase, SHP-2, resulted in dephosphorylation of TCR zeta bound to CTLA-4 and abolished the p56(lck)-inducible TCR zeta-CTLA-4 interaction. Thus, CTLA-4 inhibits TCR signal transduction by binding to TCR zeta and inhibiting tyrosine phosphorylation after T cell activation. These findings have broad implications for the negative regulation of T cell function and T cell tolerance.