Mammalian tissues contain two low M(r) phosphotyrosine protein phosphatase isoforms (type-1 and type-2) that differ in the 40-73 amino-acid sequence. Only one isoform (type-2) is strongly inhibited by pyridoxal 5'-phosphate, whereas the other is poorly inhibited by this compound. The mechanism of pyridoxal 5'-phosphate inhibition of the bovine liver enzyme (a type-2 isoform) has been studied by kinetic methods using a series of pyridoxal 5'-phosphate analogues. These studies indicate that pyridoxal 5'-phosphate interacts with the enzyme in both the phosphate and aldehyde groups. Active site-directed mutagenesis has been used to investigate the sites of pyridoxal 5'-phosphate binding. Our results indicate that Cys-17, essential for enzyme activity, interacts with the phosphate moiety of pyridoxal 5'-phosphate. On the other hand, Cys-12, which is also involved in the catalytic mechanism, does not participate in pyridoxal 5'-phosphate binding.