The Src homology-2-containing protein-tyrosine phosphatase 1 (SHP-1), is a negative regulator of cell signaling. It is also considered a tumor suppressor gene because of its ability to antagonize the action of tyrosine kinases. Although SHP-1 is expressed strongly in hematopoietic cells, decreased expression has been observed in various hematological malignancies, which suggests a central involvement of SHP-1 in leukemogenesis. We have shown previously that human T cell lymphotropic virus type-1 (HTLV-1) Tax-induced promoter silencing (TIPS) is an early event causing down-regulation of SHP-1 expression, which is dependent on NF-kappaB. In this study, DNase I footprinting and EMSA also revealed binding of transcription factors, specificity protein 1 (Sp1) and octamer-binding transcription factor 1 (Oct-1) to the P2 promoter, and site-directed mutagenesis confirmed that these factors contribute to the basal P2 promoter activity. Chromatin immunoprecipitation (CHIP) assays showed that Sp1, Oct-1, NF-kappaB, CREB-1, and RNA polymerase II interacted with the core SHP-1 P2 promoter in CD4+ T cells and Jurkat cells but not in HTLV-1-transformed MT-2 and HUT102 cells when HTLV-1 Tax is present. Furthermore, bisulfite sequencing of the SHP-1 P2 core region revealed heavy CpG methylation in HTLV-1-transformed cells compared with freshly isolated CD4+ T cells and HTLV-1-noninfected T cell lines. A significant inverse correlation between degree of CpG methylation and expression of SHP-1 mRNA or protein was observed. Taken together, our data support the notion that in HTLV-1-transformed CD4+ T cells, TIPS causes dissociation of transcription factors from the core SHP-1 P2 promoter, which in turn leads to subsequent DNA methylation, an important early step for leukemogenesis.