Impaired insulin receptor (IR) signaling leads to insulin resistance and type 2 diabetes mellitus. Several inhibitors of the IR tyrosine kinase activity have recently been described and associated with human insulin resistance. Among these negative regulators, protein tyrosine phosphatases (PTPs) are likely to play a pivotal role in IR signaling. Transgenic studies revealed that PTP1B and TCPTP are primary candidates but IR of these animals can be finally dephosphorylated, suggesting that other PTPs are also involved in the dephosphorylation of IR. In this study, we showed that receptor-type PTPepsilon (PTP epsilonM) dephosphorylated IR in rat primary hepatocytes and tyrosines 972, 1158, 1162 and 1163 were primary targets of PTP epsilonM. Wild type as well as substrate-trapping DA forms of PTPepsilonM suppressed phosphorylation of IR downstream enzymes such as Akt, extracellular regulated kinase (ERK) and glycogen synthase kinase 3 (GSK3). It was also demonstrated that PTPepsilonM suppressed insulin-induced glycogen synthesis and inhibited insulin-induced suppression of phosphoenol pyruvate carboxykinase (PEPCK) expression in primary hepatocytes. Furthermore, adenovirally introduced PTPepsilonM also exhibited inhibitory activity against suppression of PEPCK expression in mouse liver. These results suggest that PTPepsilonM is a negative regulator of IR signaling and involved in insulin-induced glucose metabolism mainly through direct dephosphorylation and inactivation of IR in hepatocytes and liver.