By using both genetic and biochemical approaches, we have investigated the physiological role of Shp-2, a cytoplasmic tyrosine phosphatase with two Src homology 2 domains, in signaling pathways downstream of epidermal growth factor receptor (EGF-R). In previous studies, a targeted deletion mutation in the SH2-N domain of Shp-2 was introduced into the murine Shp-2 locus, which resulted in embryonic lethality of homozygous mutant (Shp-2(-/-)) mice at midgestation. By aggregating Shp-2(-/-) embryonic stem cells with wild-type embryos, we created Shp-2(-/-)/wild-type chimeric animals. Most chimeras had open eyelids at birth and abnormal skin development, a phenotype characteristic of mice with mutations in EGF-R signaling components. In genetic crosses, a heterozygous Shp-2 mutation dominantly enhanced the phenotype of a weak mutant allele of EGF-R (wa-2), resulting in distinctive growth retardation, developmental defects in the skin, lung, and intestine, and perinatal mortality that are reminiscent of EGF-R knockout mice. Biochemical analysis revealed that signal propagation proximal to the EGF-R upon EGF stimulation was significantly attenuated in wa-2 fibroblast cells, which was exacerbated by the additional Shp-2 mutation. Thus, we provide biological evidence here that protein-tyrosine phosphatase Shp-2 acts to enhance information flow from the EGF-R in mouse growth and development.