To understand the physiological role of low Mr weight phosphotyrosine protein phosphatase (LMW-PTP) in insulin mediated signaling, we established clonal cell lines overexpressing the dominant negative (C12S mutant) LMW-PTP (dnLMW-PTP) from NIH3T3 murine fibroblasts expressing insulin receptor. Upon insulin stimulation we observe an association between the dnLMW-PTP and the beta-subunit of the insulin receptor. This association is dependent on the tyrosine phosphorylation of the insulin receptor since it is not observed in unstimulated cells. Furthermore, in vitro binding experiments between dnLMW-PTP and the insulin receptor reveal that the interaction is mediated by the LMW-PTP catalytic site, as indicated by competition with orthovanadate. DnLMW-PTP overexpression influences both the mitogenic and the metabolic bioeffects of insulin. In particular, in cells overexpressing dnLMW-PTP we observe an increase in the glycogenosynthesis rate and in mitosis as indicated by glucose incorporation into glycogen and thymidine incorporation into DNA, respectively. Moreover, we studied the insulin mediated signal transduction pathways starting from insulin receptor, such as the Src kinase, the p21Ras/ERK, and the PI3K routes. Our findings are consistent with a specific regulation of mitogenesis by LMW-PTP through a pathway involving c-Src kinase but independent by both PI3K and ERK. These data strongly suggest that LMW-PTP acts as a negative regulator of both mitogenetic and metabolic insulin signalling. Copyright 1997 Academic Press.