We report that the protein tyrosine phosphatase PTP-PEST is expressed in resting human and mouse CD4(+) and CD8(+) T cells, but not in Jurkat T leukemia cells, and that PTP-PEST protein, but not mRNA, was dramatically downregulated in CD4(+) and CD8(+) primary human T cells upon T cell activation. This was also true in mouse CD4(+) T cells, but less striking in mouse CD8(+) T cells. PTP-PEST reintroduced into Jurkat at levels similar to those in primary human T cells, was a potent inhibitor of TCR-induced transactivation of reporter genes driven by NFAT/AP-1 and NF-kappaB elements and by the entire IL-2 gene promoter. Introduction of PTP-PEST into previously activated primary human T cells also reduced subsequent IL-2 production by these cells in response to TCR and CD28 stimulation. The inhibitory effect of PTP-PEST was associated with dephosphorylation the Lck kinase at its activation loop site (Y394), reduced early TCR-induced tyrosine phosphorylation, reduced ZAP-70 phosphorylation and inhibition of MAP kinase activation. We propose that PTP-PEST tempers T cell activation by dephosphorylating TCR-proximal signaling molecules, such as Lck, and that down-regulation of PTP-PEST may be a reason for the increased response to TCR triggering of previously activated T cells.