Phospholipase C-gamma1 (PLC-gamma1) contains two tandem Src homology 2 (SH2) domains. The NH(2)-terminal SH2 domain has been known to mediate the binding of PLC-gamma1 to receptor protein tyrosine kinases, which then activate PLC-gamma1 via phosphorylation at Y783. We now show that the phosphorylated Y783 residue (pY783) associates with the COOH-terminal SH2 domain [SH2(C)] within the same molecule of PLC-gamma1. The specificity of this intramolecular interaction is demonstrated in several ways. The mutation of SH2(C), but not of the NH(2)-terminal SH2 domain, exposes pY783 and makes it available for binding by anti-pY783 antibodies, for intermolecular association with a GST fusion protein containing the tandem SH2 domains of PLC-gamma1 and for dephosphorylation by phosphatases. The intramolecular interaction between pY783 and SH2(C) induces a rearrangement of surface charge such that PLC-gamma1 molecules phosphorylated at Y783 are retained more strongly by heparin resins than are unphosphorylated molecules. Finally, the intramolecular interaction of pY783 with SH2(C) results in activation of phospholipase activity. Our results thus clarify the molecular mechanism of PLC-gamma1 activation, revealing the specific function of pY783 and the distinct roles of the two SH2 domains in this process.