A transiently-expressed mitogen-inducible gene has been isolated from an activated T cell cDNA library that appears to encode a phosphotyrosine phosphatase (PTPase). We have designated this gene CAP-1 for cellular activation-related phosphatase. DNA sequence analysis has revealed a 311 amino acid peptide that contains a consensus tyrosine phosphatase active site at the carboxy terminus, but is otherwise unique in sequence, possibly defining a new class of PTPase. No transmembrane domain is apparent, suggesting that CAP-1 belongs to the soluble class of PTPases. CAP-1 mRNA is expressed in mitogen-activated T cells, B cells, and fibroblasts. Consistent with expression in activated or cycling cells, CAP-1 message is also found in spleen, thymus, and bone marrow, but not in a variety of other tissues such as liver, kidney, heart, and muscle. Transfection of CAP-1 expression vectors into NIH 3T3 cells has suggested that constitutive CAP-1 expression prevents clonal selection, and therefore may be inhibitory for growth or a so-called tumor suppressor gene.