Protein tyrosine phosphatase 1B (PTP1B) is a protein tyrosine phosphatase of unknown function, although increasing evidence supports a role for this phosphatase in insulin action. We have investigated the interaction of PTP1B with the insulin receptor using a PTP1B glutathione S-transferase (GST) fusion protein with a point mutation in the enzyme's catalytic domain. This fusion protein is catalytically inactive, but the phosphatase's phosphotyrosine binding site is maintained. The activated insulin receptor was precipitated from purified receptor preparations and whole-cell lysates by the inactive PTP1B-GST, demonstrating a direct association between the insulin receptor and PTP1B. A p120 of unknown identity was also precipitated from whole-cell lysates by the PTP1B fusion protein, but IRS-1 (pp185) was not. A catalytically inactive [35S]PTP1B-fusion protein bound directly to immobilized insulin receptor kinase domains and was displaced in a concentration-dependent manner. Finally, tyrosine-phosphorylated PTP1B was precipitated from whole-cell lysates by an anti-insulin receptor antibody after insulin stimulation. The site of interaction between PTP1B and the insulin receptor was studied using phosphopeptides modeled after the receptor's kinase domain, the NPXY domain, and the COOH-terminal. Each phosphopeptide inhibited the PTP1B-GST:insulin receptor interaction. Study of mutant insulin receptors demonstrated that activation of the kinase domain is necessary for the PTP1B:insulin receptor interaction, but receptors with deletion of the NPXY domain or of the COOH-terminal can still bind to the PTP1B-GST. We conclude that PTP1B can associate directly with the activated insulin receptor at multiple different phosphotyrosine sites and that dephosphorylation by PTP1B may play a significant role in insulin receptor signal transduction.