Induction of gene expression by interferon-gamma involves the activation of a latent cytoplasmic transcription factor, p91, by phosphorylation on a single tyrosyl residue. This phosphorylation triggers dimerization, nuclear translocation, and the binding of p91 to interferon-gamma response elements present in the promoters of induced genes. Phosphorylation of p91 requires the activation of two tyrosine kinases, JAK1 and JAK2, that themselves become phosphorylated on tyrosyl residues shortly after interferon-gamma binds to its receptor. The importance of tyrosine phosphorylation in this pathway prompted us to investigate the role of protein tyrosine phosphatases in the regulation of the pathway. We find that in the absence of interferon-gamma, treatment of cells with an inhibitor of tyrosine phosphatases causes a rapid and potent activation of the components of the interferon-gamma signal transduction pathway and induces an interferon-gamma-responsive gene. This suggests that tyrosine phosphatases act both to repress the interferon-gamma signal transduction pathway in the absence of interferon-gamma and to downregulate the pathway after interferon-gamma induction.