Prolactin (PRL) plays a central and crucial role in the regulation of milk protein gene expression in mammary epithelial cells. PRL binding to its cognate receptor leads to receptor dimerization and activation of the tyrosine kinase Janus kinase 2 (JAK2), associated with the membrane-proximal, intracellular domain of the receptor. In turn, JAK2 phosphorylates and activates STAT5, a member of the signal transducers and activators of transcription (STAT) family. We have recently reported that 16 different protein-tyrosine phosphatases (PTP) were expressed in lactating mouse mammary gland and mammary epithelial cells (Aoki, N., Kawamura, M., Yamaguchi-Aoki, Y., Ohira, S., and Matsuda, T. (1999) J. Biochem. (Tokyo) 125, 669-675). We investigated the involvement of each PTP in PRL signaling. Among the 12 phosphatases including SHP-2 examined, a cytosolic phosphatase PTP1B was found to specifically dephosphorylate STAT5a and STAT5b in transfected COS7 and in vitro. Nuclear translocation of STAT5a and STAT5b was largely inhibited upon overexpression of PTP1B. The PRL-dependent transcriptional activation of the beta-casein gene promoter was also inhibited by PTP1B. Furthermore, retrovirus-mediated overexpression of PTP1B resulted in dephosphorylation of endogenous STAT5 and down-regulation of beta-casein gene expression in mammary epithelial COMMA-1D cells when the cells were treated with lactogenic hormones. Endogenous tyrosine-phosphorylated STAT5 proteins in mammary epithelial COMMA-1D cells as well as tyrosine-phosphorylated STAT5a and STAT5b expressed in COS7 cells were co-precipitated by substrate-trapping mutants of recombinant PTP1B. These results strongly suggest that PTP1B dephosphorylates PRL-activated STAT5a and STAT5b, thereby negatively regulating PRL-mediated signaling pathway.