The negative regulation of T- or B-cell antigen receptor signaling by CD5 was proposed based on studies of thymocytes and peritoneal B-1a cells from CD5-deficient mice. Here, we show that CD5 is constitutively associated with phosphotyrosine phosphatase activity in Jurkat T cells. CD5 was found associated with the Src homology 2 (SH2) domain containing hematopoietic phosphotyrosine phosphatase SHP-1 in both Jurkat cells and normal phytohemagglutinin-expanded T lymphoblasts. This interaction was increased upon T-cell receptor (TCR)-CD3 cell stimulation. CD5 co-cross-linking with the TCR-CD3 complex down-regulated the TCR-CD3-increased Ca2+ mobilization in Jurkat cells. In addition, stimulation of Jurkat cells or normal phytohemagglutinin-expanded T lymphoblasts through TCR-CD3 induced rapid tyrosine phosphorylation of several protein substrates, which was substantially diminished after CD5 cross-linking. The CD5-regulated substrates included CD3zeta, ZAP-70, Syk, and phospholipase Cgammal but not the Src family tyrosine kinase p56(lck). By mutation of all four CD5 intracellular tyrosine residues to phenylalanine, we found the membrane-proximal tyrosine at position 378, which is located in an immunoreceptor tyrosine-based inhibitory (ITIM)-like motif, crucial for SHP-1 association. The F378 point mutation ablated both SHP-1 binding and the down-regulating activity of CD5 during TCR-CD3 stimulation. These results suggest a critical role of the CD5 ITIM-like motif, which by binding to SHP-1 mediates the down-regulatory activity of this receptor.