Few tyrosine phosphatases support, rather than inhibit, survival of tumor cells. We present genetic evidence that receptor-type protein-tyrosine phosphatase (RPTP)-epsilon performs such a function, as cells from mammary epithelial tumors induced by activated Neu in mice genetically lacking RPTPepsilon appeared morphologically less transformed and exhibited reduced proliferation. We show that at the molecular level, RPTPepsilon activates Src, a known collaborator of Neu in mammary tumorigenesis. Lack of RPTPepsilon reduced Src activity and altered Src phosphorylation in tumor cells; RPTPepsilon dephosphorylated and activated Src; and Src bound a substrate-trapping mutant of RPTPepsilon. The altered morphology of tumor cells lacking RPTPepsilon was corrected by exogenous Src and exogenous RPTPepsilon or RPTPalpha; exogenous activated Src corrected also the growth rate phenotype. Together, these results suggest that the altered morphology of RPTPepsilon-deficient tumor cells is caused by reduced Src activity, caused, in turn, by lack of RPTPepsilon. Unexpectedly, the phenotype of RPTPepsilon-deficient tumor cells occurs despite expression of the related RPTPalpha, indicating that endogenous RPTPalpha does not compensate for the absence of RPTPepsilon in this case. We conclude that RPTPepsilon is a physiological activator of Src in Neu-induced mammary tumors and suggest that pharmacological inhibition of phosphatases that activate Src may be useful to augment direct pharmacological inhibition of Src.