The receptor-like protein tyrosine phosphatase RPTP mu contains three intracellular domains: the juxtamembrane (JM) and two phosphatase domains (D1 and D2), D1 is catalytically active in vitro. The functional roles of JM and D2 are still unclear. To find out whether and how they modulate the phosphatase activity of D1, we compared the enzymatic characteristics of two constructs, containing a truncated JM and either D1 or both phosphatase domains. p-Nitrophenyl phosphate and two peptide substrates were efficiently dephosphorylated by both constructs. The specificity constant of D1 alone was up to 50% higher. D2 induces (a) decreased K-m values for peptide substrates, (b) decreased catalytic efficiency for these substrates, (c) shifting of the optimal pH to slightly lower values, and (d) looser binding of competitive inhibitors. These data suggest that the phosphatase activity of D1 is negatively modulated and its ligand binding capacity is sensibly modified by domain D2, having possible functional significance.