The expression of the receptor protein tyrosine phosphatase r-PTPη is drastically reduced in rat and human malignant thyroid cells, whereas its restoration reverts the neoplastic phenotype of retrovirally transformed rat thyroid cells. Moreover, reduced levels and loss of heterozygosity of DEP-1, the human homolog of r-PTPη, have been found in many human neoplasias. Here, we report that the r-PTPη protein binds to c-Src in living cells and dephosphorylates the c-Src inhibitory tyrosine phosphorylation site (Tyr 529), thereby increasing c-Src tyrosine kinase activity in malignant rat thyroid cells stably transfected with r-PTPη. Tyrosine phosphorylation of focal adhesion kinase (FAK) and paxillin was enhanced in r-PTPη-expressing cells. This was associated with increased adhesion of malignant r-PTPη-transfected thyroid cells vs both untransfected cells and cells stably transfected with an inactive r-PTPη mutant. Treatment of rat thyroid cells with the c-Src inhibitor PP2 decreased cell adhesion to a higher extent in r-PTPη-transfected cells than in mock-transfected or stably transfected cells with the inactive r-PTPη mutant, indicating that r-PTPη regulates cell–substratum adhesion by activating c-Src. Interestingly, the extent of both c-Src dephosphorylation at Tyr 529, FAK and paxillin phosphorylation, and the increased cell adhesion were associated with the degree of r-PTPη expression.