We have examined the effect of expression of the protein tyrosine phosphatase Shp2 on transformation by the mouse polyoma virus middle T antigen (PyMT). Gain-of-function mutations in Shp2 indicate that it may serve as an oncogene in several types of human leukemia. Paradoxically, however, some catalytically dominant-negative mutations of Shp2 have also been identified in leukemia and neuroblastomas. In this study, we show that Shp2 suppresses transformation induced by PyMT, the major polyoma viral oncoprotein known to act through binding and activation of pp60 c-src. Over-expression of a catalytically inactive Shp2 mutant in NIH3T3 cells significantly enhanced PyMT-induced transformation. Conversely, re-introduction of Shp2 into Shp2-deficient cells strongly inhibited PyMT-induced transformation and tumorigenesis. Short hairpin RNA (shRNA)-mediated Shp2 knockdown potentiated PyMT-induced transformation. Finally, we present evidence that the transformation-suppressive effects of Shp2 are mediated at least partially through the inhibition of signal transducers and activators of transcription 3.