Nicotine, a component of tobacco, is highly addictive but possesses beneficial properties such as cognitive improvements and memory maintenance. Involved in these processes is the neuronal nicotinic acetylcholine receptor (nAChR) alpha7, whose activation triggers depolarization, intracellular signaling cascades, and synaptic plasticity underlying addiction and cognition. It is therefore important to investigate intracellular mechanisms by which a cell regulates alpha7 nAChR activity. We have examined the role of phosphorylation by combining molecular biology, biochemistry, and electrophysiology in SH-SY5Y neuroblastoma cells, Xenopus oocytes, rat hippocampal interneurons, and neurons from the supraoptic nucleus, and we found tyrosine phosphorylation of alpha7 nAChRs. Tyrosine kinase inhibition by genistein decreased alpha7 nAChR phosphorylation but strongly increased acetylcholine-evoked currents, whereas tyrosine phosphatase inhibition by pervanadate produced opposite effects. Src-family kinases (SFKs) directly interacted with the cytoplasmic loop of alpha7 nAChRs and phosphorylated the receptors at the plasma membrane. SFK inhibition by PP2 [4-amino-5-(4-chlorophenyl)-7-(t-butyl)pyrazolo[3,4-d]pyrimidine] or SU6656 (2,3-dihydro-N,N-dimethyl-2-oxo-3-[(4,5,6,7-tetrahydro-1H-indol-2-yl)methylene]-1H-indole-5-sulfonamide) increased alpha7 nAChR-mediated responses, whereas expression of active Src reduced alpha7 nAChR activity. Mutant alpha7 nAChRs lacking cytoplasmic loop tyrosine residues because of alanine replacement of Tyr-386 and Tyr-442 were more active than wild-type receptors and insensitive to kinase or phosphatase inhibition. Because the amount of surface alpha7 receptors was not affected by kinase or phosphatase inhibitors, these data show that functional properties of alpha7 nAChRs depend on the tyrosine phosphorylation status of the receptor and are the result of a balance between SFKs and tyrosine phosphatases. These findings reveal novel regulatory mechanisms that may help to understand nicotinic receptor-dependent plasticity, addiction, and pathology.