Receptor protein-tyrosine phosphatase RPTP alpha is found associated in vivo with the adaptor protein Grb2. Formation of this complex, which contains no detectable levels of Sos, is known to depend on a C-terminal phosphorylated tyrosine residue (Tyr(798)) in RPTP alpha and on the Src homology (SH) 2 domain in Grb2 (1, 2). We show here that association of Grb2 with RPTP alpha also involves a critical function for the C-terminal SH3 domain of Grb2. Furthermore, Grb2 SH3 binding peptides interfere with RPTP alpha-Grb2 association in vitro, and the RPTP alpha protein can dissociate the Grb2-Sos complex in vivo. These observations constitute a novel mode of Grb2 association and suggest a model in which association with a tyrosine-phosphorylated protein restricts the repertoire of SH3 binding proteins with which Grb2 can simultaneously interact. The function of the Tyr(798) tyrosine phosphorylation/Grb2 binding site in RPTP alpha was studied further by expression of wild type or mutant RPTP alpha proteins in PC12 cells. In these cells, wild type RPTP alpha interferes with acidic fibroblast growth factor-induced neurite outgrowth; this effect requires both the catalytic activity and the Grb2 binding Tyr(798) residue in RPTP alpha. In contrast, expression of catalytically active RPTP alpha containing a mutated tyrosine phosphorylation/Grb2 association site enhances neurite outgrowth. Our observations associate a functional effect with tyrosine phosphorylation of, and ensuing association of signaling proteins with, a receptor protein-tyrosine phosphatase and raise the possibility that RPTP alpha association may modulate Grb2 function and vice versa.