Protein-tyrosine phosphatase 1B (PTP-1B) is the prototypic tyrosine phosphatase whose function in insulin signaling and metabolism is well established. Although the role of PTP-1B in dephosphorylating various cell surface receptor tyrosine kinases is clear, the mechanisms by which it modulates receptor function from the endoplasmic reticulum (ER) remains an enigma. Here, we provide evidence that PTP-1B has an essential function in regulating the unfolded protein response in the ER compartment. The absence of PTP-1B caused impaired ER stress-induced IRE1 signaling. More specifically, JNK activation, XBP-1 splicing, and EDEM (ER degradation-enhancing alpha-mannosidase-like protein) gene induction, as well as ER stress-induced apoptosis, were attenuated in PTP-1B knock-out mouse embryonic fibroblasts in response to two ER stressors, tunicamycin and azetidine-2 carboxylic acid. We demonstrate that PTP-1B is not just a passive resident of the ER but on the contrary has an essential role in potentiating IRE1-mediated ER stress signaling pathways.