Src homology 2-containing phosphotyrosine phosphatase (Shp2) functions as a positive effector in receptor tyrosine kinase (RTK) signaling immediately proximal to activated receptors. However, neither its physiological substrate(s) nor its mechanism of action in RTK signaling has been defined. In this study, we demonstrate that Sprouty (Spry) is a possible target of Shp2. Spry acts as a conserved inhibitor of RTK signaling, and tyrosine phosphorylation of Spry is indispensable for its inhibitory activity. Shp2 was able to dephosphorylate fibroblast growth factor receptor-induced phosphotyrosines on Spry both in vivo and in vitro. Shp2-mediated dephosphorylation of Spry resulted in dissociation of Spry from Grb2. Furthermore, Shp2 could reverse the inhibitory effect of Spry on FGF-induced neurite outgrowth and MAP kinase activation. These findings suggest that Shp2 acts as a positive regulator in RTK signaling by dephosphorylating and inactivating Spry.