Protein tyrosine phosphatases all contain a conserved cysteine that forms an intermediate thiophosphate ester bond during tyrosine phosphate hydrolysis. A bacterial glutathione S-transferase fusion protein containing rat brain phosphatase PTP1b was constructed in which this conserved cysteine was mutated to serine. The resulting catalytically inactive enzyme was labeled in vivo to high specific activity with 35S, and the binding of this labeled fusion protein to the immunoprecipitated epidermal growth factor (EGF) receptor was evaluated. The binding was ligand-dependent, and saturation analysis revealed a nonlinear Scatchard plot, with a Kd for high affinity binding of approximately 100 nM. A number of glutathione S-transferase fusion proteins containing src homology 2 (SH2) domains attenuated phosphatase binding in a concentration-dependent manner. Phospholipase C (PLC) gamma and the GTPase-activating protein of ras were the most potent inhibitors. Tyrosine-phosphorylated EGF receptor peptide fragments were evaluated for specific inhibition of PTP1b and PLC gamma SH2 binding to the activated receptor. One such peptide, modeled on EGF receptor tyrosine 992, blocked the binding of both fusion proteins. Another phosphopeptide, modeled on tyrosine 1148, inhibited the binding of PTP1b but not the PLC gamma fusion protein. This site specificity was confirmed by analysis of equilibrium binding of the fusion proteins to EGF receptors mutated in each of these phosphorylation sites. The results revealed clear sequence specificity in the binding of proteins involved in the regulation of intracellular signaling by receptor tyrosine kinases.