Low molecular weight protein tyrosine phosphatases (LMW-PTPs) are small enzymes that are ubiquitous in many organisms. They are important in biological processes such as cell proliferation, adhesion, migration, and invasiveness. LMW-PTP is expressed in mammalian cells as two isoforms (IF1 and IF2) originating through alternative splicing. We have previously shown that IF2 targets lipid rafts called caveolae and interacts with caveolin-1, their major structural protein. Caveolae are cholesterol- and sphingolipid-rich membrane microdomains that have been implicated in a variety of cellular functions, including signal transduction events. Caveolin-1 contains a scaffolding region that contributes to the binding of the protein to the plasma membrane and mediates protein omo- and etero-oligomerization. Interaction of many signaling molecules with the scaffolding domain sequesters them into caveolae and inhibits or suppresses their activities. Caveolin-interacting proteins usually have a typical sequence motif, also present in all the LMW-PTPs, which is characterized by aromatic or large hydrophobic residues in specific positions. We have examined here the interaction of the LMW-PTP isoforms with caveolin-1 and its molecular mechanism, together with the consequences for their tyrosine phosphatase activities. We found that IF1 and IF2 are both capable of interacting with defined regions of caveolin-1 and that their putative caveolin binding sequence motif is not responsible for the association. The formation of LMW-PTP/caveolin-1 complexes is accompanied by modulation of the enzyme activities, and the inhibitory effect elicited against IF1 is stronger than that against IF2. The caveolin scaffolding domain is directly involved in the observed phenomena.