The tyrosine phosphatase PTP-PEST has been implicated in the regulation of cell spreading and migration through dephosphorylation of focal adhesion proteins and inhibition of Rac GTPase activity. The focal adhesion adaptor protein paxillin is also necessary for normal cell migration and binds directly to PTP-PEST. In this study, we have utilized PTP-PEST(-/-) and paxillin(-/-) fibroblasts to demonstrate that paxillin is essential for PTP-PEST inhibition of cell spreading and membrane protrusion as well as inhibition of adhesion-induced Rac activation. Furthermore, we show that paxillin-binding is necessary for PTP-PEST stimulation of cell migration. Mutation analysis indicates that PTP-PEST function involves binding to the paxillin C-terminal LIM domains, and signaling through the tyrosine 31 and 118 phosphorylation sites, as well as the LD4 motif of the paxillin N-terminus. Using 'substrate trapping' approaches and immunoprecipitation, we show that the ARF GAP paxillin kinase linker PKL/GIT2, a paxillin LD4 binding partner, is a substrate for PTP-PEST. Additionally, the PKL-paxillin interaction was necessary for PTP-PEST inhibition of cell spreading. These data provide mechanistic insight into how the paxillin-PTP-PEST interaction contributes to integrin signaling events associated with the spatiotemporal regulation of key modulators of the cytoskeleton and cell motility machinery.