Shp-2, a src homology (SH)2-containing phosphotyrosine phosphatase, appears to be involved in cytoplasmic signaling downstream of a variety of cell surface receptors, although the mechanism is unclear. Here, we have determined a role of Shp-2 in the cytokine circuit for inflammatory and immune responses. Production of interleukin (IL)-6 in response to IL-1 alpha or tumor necrosis factor (TNF)-alpha was nearly abolished in homozygous mutant (Shp-2(-/)-) fibroblast cells. The targeted Shp-2 mutation has no significant effect on the activation of the three types of mitogen-activated protein (MAP) kinases, extracellular signal-regulated kinase (Erk), c-Jun NH(2)-terminal kinase (Jnk), and p38, by IL-1/TNF, indicating that Shp-2 does not work through MAP kinase pathways in mediating IL-1/TNF-induced IL-6 synthesis. In contrast, IL-1/TNF-stimulated nuclear factor (NF)-kappa B DNA binding activity and inhibitor of kappa B (I kappa B) phosphorylation was dramatically decreased in Shp-2(-/)- cells, while the expression and activity of NF-kappa B-inducing kinase (NIK), Akt, and I kappa B kinase (IKK) were not changed. Reintroduction of a wild-type Shp-2 protein into Shp-2(-/)- cells rescued NF-kappa B activation and IL-6 production in response to IL-1/TNF stimulation. Furthermore, Shp-2 tyrosine phosphatase was detected in complexes with IKK as well as with IL-1 receptor. Thus, this SH2-containing enzyme is an important cytoplasmic factor required for efficient NF-kappa B activation. These results elucidate a novel mechanism of Shp-2 in cytokine signaling by specifically modulating the NF-kappa B pathway in a MAP kinase-independent fashion.