Basal levels of nuclear localized, tyrosine phosphorylated Stat5 are present in healthy human breast epithelia. In contrast, Stat5 phosphorylation is frequently lost during breast cancer progression, a finding that correlates with loss of histological differentiation and poor patient prognosis. Identifying the mechanisms underlying loss of Stat5 phosphorylation could provide novel targets for breast cancer therapy. Pervanadate, a general tyrosine phosphatase inhibitor, revealed marked phosphatase regulation of Stat5 activity in breast cancer cells. Lentiviral-mediated shRNA allowed specific examination of the regulatory role of five tyrosine phosphatases (PTP1B, TC-PTP, SHP1, SHP2, and VHR), previously implicated in Stat5 regulation in various systems. Enhanced and sustained prolactin-induced Stat5 tyrosine phosphorylation was observed in T47D and MCF7 breast cancer cells selectively in response to PTP1B depletion. Conversely, PTP1B overexpression suppressed prolactin-induced Stat5 tyrosine phosphorylation. Furthermore, PTP1B knockdown increased Stat5 reporter gene activity. Mechanistically, PTP1B suppression of Stat5 phosphorylation was mediated, at least in part, through inhibitory dephosphorylation of the Stat5 tyrosine kinase, Jak2. PTP1B knockdown enhanced sensitivity of T47D cells to prolactin phosphorylation of Stat5 by reducing the EC(50) from 7.2 nmol/L to 2.5 nmol/L. Immunohistochemical analyses of two independent clinical breast cancer materials revealed significant negative correlations between levels of active Stat5 and PTP1B, but not TC-PTP. Collectively, our data implicate PTP1B as an important negative regulator of Stat5 phosphorylation in invasive breast cancer.