Treatment of HC11 mammary epithelial cells with the lactogenic hormone PRL promotes differentiation and induction of milk protein gene expression via stimulation of the Janus kinase (JAK)/signal transducer and activator of transcription pathway. We have previously shown that autocrine activation of epidermal growth factor (EGF) receptor interferes with normal PRL-induced differentiation. Here we show that PRL activation of JAK2 was dramatically reduced in HC11 cells pretreated with EGF, demonstrating that the target of EGF receptor activation is JAK2 kinase. Using an in-gel protein tyrosine phosphatase (PTP) assay, we observed that the activity of a 125-kDa PTP was up-regulated in HC11 cells in response to EGF. A specific antiserum was used to demonstrate that the 125-kDa PTP was PTP-PEST and to show that EGF treatment of HC11 cells led to an increase in the level of PTP-PEST. In intact HC11 cells, PTP-PEST was constitutively associated with JAK2, and in response to EGF treatment there was an increased level of PTP-PEST in JAK2 complexes. An in vitro phosphatase assay, using PRL-activated JAK2 as the substrate and lysates from HC11 cells as the source of PTP-PEST, revealed that JAK2 could serve as a PTP-PEST substrate. However, in intact cells the regulation of JAK2 by PTP-PEST was complex, since transient overexpression of PTP-PEST had a negligible effect on PRL-induced JAK2 activation. EGF's negative influence on JAK2 activity was blocked by actinomycin D treatment of HC11 cells, suggesting that EGF induced a protein that mediated the effects of PTP-PEST on JAK2. In support of this model, PTP-PEST-containing lysates from EGF-treated HC11 cells dephosphorylated JAK2 to a greater extent than lysates prepared from control cells.