Phosphotyrosine phosphatase (PTPase) activity in rat liver was measured using a phosphopeptide substrate containing sequence identity to the major site of insulin receptor autophosphorylation. PTPase activity was detected in both cytosolic and particulate fractions of rat liver and produced linear dephosphorylation over a 15-min time course. In rats made insulin-deficient diabetic by streptozotocin treatment (STZ), cytosolic PTPase activity increased to 180% of the control values after 2 d of diabetes and remained elevated at 30 d (P less than 0.02). Gel filtration on Sephadex-75 revealed a single peak of activity in the cytosol in both control and diabetic animals and confirmed the increased levels. In BB diabetic rats, another model of insulin deficiency, the PTPase activity in the cytosolic fraction was increased to approximately 230% of control values. PTPase activity in the particulate fraction of liver was also increased by 30 and 80% after 2 and 8 d of STZ diabetes, respectively. However, this increase was not sustained and after 30 d of STZ diabetes, PTPase activity associated with the particulate fraction in the BB diabetic rat was reduced to approximately 70% of the control levels. Treatment of STZ diabetic rats with subcutaneous insulin or vanadate in their drinking water for 3 d reduced tyrosine PTPase activity in the particulate, but not in the cytosolic fraction. This was associated with a change in blood glucose toward normal. These data indicate insulin deficient diabetes is accompanied by significant changes in hepatic PTPase activity. Since tyrosine phosphorylation plays a central role in the cellular action of insulin receptor, an increase in PTPase activity may be an important factor in the altered insulin action associated with these diabetic states.