The focal adhesion protein p130(Cas) was identified as a substrate for the protein-tyrosine phosphatase (PTP)-PEST, and the specificity of this interaction is mediated by a dual mechanism involving a Src homology 3 domain-mediated binding and PTP domain recognition. Recently, paxillin was also demonstrated to interact with PTP-PEST (Shen, Y., Schneider, G., Cloutier, J. F., Veillette, A., and Schaller, M. D. (1998) J. Biol. Chem. 273, 6474-6481). In the present study, we show that amino acids 344-397 of PTP-PEST are sufficient for the binding to paxillin. We demonstrate that a proline-rich segment of PTP-PEST (Pro 2), 355PPEPHPVPPILTPSPPSAFP374, is essential for this interaction in vivo. Furthermore, mutation of proline residues within the Pro 2 motif reveal that proline 362 is critical for the binding of paxillin. Conversely, using deletion and point mutants of paxillin, LIM 3 and 4 domains were both found to be necessary for binding of PTP-PEST. Finally, using a "substrate trapping" approach, we demonstrate that, unlike p130(Cas), paxillin is not a substrate for PTP-PEST. In conclusion, we show that a novel proline-rich motif found in PTP-PEST serves as a ligand for the LIM domains of paxillin. Interestingly, the focal adhesion targeting of paxillin is mediated by LIM 3. Thus, we propose that PTP-PEST, by a competition with the ligand of paxillin in the focal adhesion complex, could contribute to the removal of paxillin from the adhesion sites and consequently promote focal adhesion turnover.