Activation of the somatostatin receptor sst2 inhibits cell proliferation by a mechanism involving the stimulation of the protein-tyrosine phosphatase SHP-1. The cell cycle regulatory events leading to sst2-mediated growth arrest are not known. Here, we report that treatment of Chinese hamster ovary cells expressing sst2 with the somatostatin analogue, RC-160, led to G1 cell cycle arrest and inhibition of insulin-induced S-phase entry through induction of the cyclin-dependent kinase inhibitor p27(Kip1). Consequently, a decrease of p27(Kip1)-cdk2 association, an inhibition of insulin-induced cyclin E-cdk2 kinase activity, and an accumulation of hypophosphorylated retinoblastoma gene product (Rb) were observed. However, RC-160 had no effect on the p21(Waf1/Cip1). When sst2 was coexpressed with a catalytically inactive mutant SHP-1 in Chinese hamster ovary cells, mutant SHP-1 induced entry into cell cycle and down-regulation of p27(Kip1) and prevented modulation by insulin and RC-160 of p27(Kip1) expression, p27(Kip1)-cdk2 association, cyclin E-cdk2 kinase activity, and the phosphorylation state of Rb. In mouse pancreatic acini, RC-160 reverted down-regulation of p27(Kip1) induced by a mitogen, and this effect did not occur in acini from viable motheaten (mev/mev) mice expressing a mutant SHP-1 with markedly deficient enzymes. These findings provide the first evidence that sst2 induces cell cycle arrest through the up-regulation of p27(Kip1) and demonstrate that SHP-1 is required for maintaining high inhibitory levels of p27(Kip1) and is a critical target of the insulin, and somatostatin signaling cascade, leading to the modulation of p27(Kip1).