The receptor protein-tyrosine phosphatase mu (PTPmu) is a homophilic adhesion protein thought to regulate cell-cell adhesion in the vascular endothelium through dephosphorylation of cell junction proteins. In subconfluent cell cultures, PTPmu resides in an intracellular membrane pool; however, as culture density increases and cell contacts form, the phosphatase localizes to sites of cell-cell contact, and its expression level increases. These characteristics of PTPmu, which are consistent with a role in cell-cell adhesion, suggest that control of subcellular localization is an important mechanism to regulate the function of this phosphatase. To gain a better understanding of how PTPmu is regulated, we examined the importance of the conserved immunoglobulin domain, containing the homophilic binding site, in control of the localization of the enzyme. Deletion of the immunoglobulin domain impaired localization of PTPmu to the cell-cell contacts in endothelial and epithelial cells. In addition, deletion of the immunoglobulin domain affected the distribution of PTPmu in subconfluent endothelial cells when homophilic binding to another PTPmu molecule on an apposing cell was not possible, resulting in an accumulation of the mutant phosphatase at the cell surface with a concentration at the cell periphery in the region occupied by focal adhesions. This aberrant localization correlated with reduced survival and alterations in normal focal adhesion and cytoskeleton morphology. This study therefore illustrates the critical role of the immunoglobulin domain in regulation of the localization of PTPmu and the importance of such control for the maintenance of normal cell physiology.