Src-specific activity has been reported to be elevated in a high percentage of colon cancer cell lines and tumors, but the underlying mechanisms are largely unknown. In this study, we report that, in the seven cancer cell lines tested, Src-specific activity was elevated (5.2- to 18.7-fold) relative to normal colon cells (FHC). This activation of Src correlated with reduced phosphorylation at Y530 of Src, whereas there was no significant change in the level of phosphorylation at Y419. The membrane tyrosine phosphatase activity for a Src family-specific phosphopeptide substrate FCP (Fyn COOH-terminal peptide phosphorylated by Csk) was greatly increased in the cancer cells and was attributed to PTP1B in most of the cell lines. Membrane PTP1B protein levels were also greatly increased. Overexpression of PTP1B increased Src specific activity in colon cancer cells by reducing phosphorylation at Y530 of Src. It also increased anchorage-independent cell growth and this increase was blocked by the Src inhibitor PP2 and Src small interfering RNA (siRNA). Down-regulating PTP1B activity by PTP1B inhibitor CinnGEL 2Me or knocking down PTP1B using siRNA also reduced Src kinase activity and colony formation ability of colon cancer cells. PTP1B siRNA reduced tumor growth in nonobese diabetic/severe combined immunodeficient mice. This study suggests that (a) PTP1B can act as an important activator of Src in colon cancer cells via dephosphorylation at Y530 of Src and (b) elevated levels of PTP1B can increase tumorigenicity of colon cancer cells by activating Src.