Sprouty proteins are recently identified receptor tyrosine kinase (RTK) inhibitors potentially involved in many developmental processes. Here, we report that Sprouty proteins become tyrosine phosphorylated after growth factor treatment. We identified Tyr55 as a key residue for Sprouty2 phosphorylation and showed that phosphorylation was required for Sprouty2 to inhibit RTK signaling, because a mutant Sprouty2 lacking Tyr55 augmented signaling. We found that tyrosine phosphorylation of Sprouty2 affected neither its subcellular localization nor its interaction with Grb2, FRS2/SNT, or other Sprouty proteins. In contrast, Sprouty2 tyrosine phosphorylation was necessary for its binding to the Src homology 2-like domain of c-Cbl after fibroblast growth factor (FGF) stimulation. To determine whether c-Cbl was required for Sprouty2-dependent cellular events, Sprouty2 was introduced into c-Cbl-wild-type and -null fibroblasts. Sprouty2 efficiently inhibited FGF-induced phosphorylation of extracellular signal-regulated kinase 1/2 in c-Cbl-null fibroblasts, thus indicating that the FGF-dependent binding of c-Cbl to Sprouty2 was dispensable for its inhibitory activity. However, c-Cbl mediates polyubiquitylation/proteasomal degradation of Sprouty2 in response to FGF. Last, using Src-family pharmacological inhibitors and dominant-negative Src, we showed that a Src-like kinase was required for tyrosine phosphorylation of Sprouty2 by growth factors. Thus, these data highlight a novel negative and positive regulatory loop that allows for the controlled, homeostatic inhibition of RTK signaling.