SHP-2, a nontransmembrane-type protein-tyrosine phosphatase that contains two Src homology 2 (SH2) domains, is thought to participate in growth factor signal transduction pathways via SH2 domain interactions. To determine the role of each region of SHP-2 in platelet-derived growth factor signaling assayed by Elk-1 activation, we generated six deletion mutants of SHP-2. The large SH2 domain deletion SHP-2 mutant composed of amino acids 198-593 (SHP-2-(198-593)), but not the smaller SHP-2-(399-593), showed significantly higher SHP-2 phosphatase activity in vitro. In contrast, SHP-2-(198-593) mutant inhibited wild type SHP-2 phosphatase activity, whereas SHP-2-(399-593) mutant increased activity. To understand these functional changes, we focused on the docking protein Gab1 that assembles signaling complexes. Pull-down experiments with Gab1 suggested that the C-terminal region of SHP-2 as well as the SH2 domains (N-terminal region) associated with Gab1, but the SHP-2-(198-593) mutant did not associate with Gab1. SHP-2-(1-202) or SHP-2-(198-593) inhibited platelet-derived growth factorinduced Elk-1 activation, but SHP-2-(399-593) increased Elk-1 activation. Co-expression of SHP-2-(1-202) with SHP-2-(399-593) inhibited SHP-2-(399-593)/Gab1 interaction, and the SHP-2-(399-593) mutant induced SHP-2 phosphatase and Elk-1 activation, supporting the autoinhibitory effect of SH2 domains on the C-terminal region of SHP-2. These data suggest that both SHP-2/Gab1 interaction in the C-terminal region of SHP-2 and increased SHP-2 phosphatase activity are important for Elk-1 activation. Furthermore, we identified a novel sequence for SHP-2/Gab1 interactions in the C-terminal region of SHP-2.