We have cloned a Dictyostelium phosphotyrosine phosphatase (PTP1) with a catalytic domain showing approximately 38%-50% amino acid identity to those of other PTPs. PTP1 contains an approximately 99 amino acid insert and bacterially produced PTP1 possesses PTP activity. PTP1 is expressed at a very low level in vegetative cells, induced by 4 hr, and maximally expressed at the tight aggregate stage. PTP1-lacZ studies indicate that PTP1 is spatially localized to prestalk and anterior-like cell types. PTP1 gene disruptants show accelerated development, whereas strains overexpressing PTP1 to a high level fail to aggregate. Strains overexpressing moderate levels exhibit severe morphological defects following aggregation, including multiply tipped aggregates and morphologically aberrant fruiting bodies. Western blot analysis using anti-phosphotyrosine antibodies shows specific changes in the mutant strains when compared with wild-type cells. The results indicate that reversible protein-tyrosine phosphorylation and PTP1 play important regulatory roles during Dictyostelium development.