Epithelial morphogenesis is critical during development and wound healing, and alterations in this program contribute to neoplasia. Met, the hepatocyte growth factor (HGF) receptor, promotes a morphogenic program in epithelial cell lines in matrix cultures. Previous studies have identified Gab1, the major phosphorylated protein following Met activation, as important for the morphogenic response. Gab1 is a docking protein that couples the Met receptor with multiple signaling proteins, including phosphatidylinositol-3 kinase, phospholipase Cgamma, the adapter protein Crk, and the tyrosine specific phosphatase SHP-2. HGF induces sustained phosphorylation of Gab1 and sustained activation of extracellular signal-regulated kinase (Erk) in epithelial Madin-Darby canine kidney cells. In contrast, epidermal growth factor fails to promote a morphogenic program and induces transient Gab1 phosphorylation and Erk activation. To elucidate the Gab1-dependent signals required for epithelial morphogenesis, we undertook a structure-function approach and demonstrate that association of Gab1 with the tyrosine phosphatase SHP-2 is required for sustained Erk activation and for epithelial morphogenesis downstream from the Met receptor. Epithelial cells expressing a Gab1 mutant protein unable to recruit SHP-2 elicit a transient activation of Erk in response to HGF. Moreover, SHP-2 catalytic activity is required, since the expression of a catalytically inactive SHP-2 mutant, C/S, abrogates sustained activation of Erk and epithelial morphogenesis by the Met receptor. These data identify SHP-2 as a positive modulator of Erk activity and epithelial morphogenesis downstream from the Met receptor.