The lytic activity of natural killer (NK) cells is inhibited by the expression of class I major histocompatibility complex (MHC) antigens on target cells. In murine NK cells, Ly-49A mediates inhibition of cytotoxicity in response to the class I MHC antigen H-2Dd. In this report, we studied the function of mouse Ly-49A in both the rat NK cell tumor line, RNK-16, transfected with Ly-49A cDNA, and in primary NK cells. We show that ligation of Ly-49A by H-2Dd inhibits early signaling events during target cell stimulation, including polyphosphoinositide turnover and tyrosine phosphorylation. We also show that Ly-49A directly associates with the cytoplasmic tyrosine phosphatase SHP-1, and that Ly-49A function is impaired in NK cells from SHP-1 mutant viable motheaten mice and from SHP-1-deficient motheaten mice. Finally, we demonstrate that mutational substitution of the tyrosine within the proposed SHP-1 binding motif in Ly-49A completely abrogates inhibition of NK cell cytotoxicity through this receptor. These results demonstrate that Ly-49A interrupts early activating signals in NK cells, and that SHP-1 is an important mediator of Ly-49A function.