The Src homology phosphotyrosyl phosphatase 2 (SHP2) plays a positive role in HER2-induced signaling and transformation, but its mechanism of action is poorly understood. Given the significance of HER2 in breast cancer, defining a mechanism for SHP2 in the HER2 signaling pathway is of paramount importance. In the current report we show that SHP2 positively modulates the Ras-extracellular signal-regulated kinase 1 and 2 and the phospoinositide-3-kinase-Akt pathways downstream of HER2 by increasing the half-life the activated form of Ras. This is accomplished by dephosphorylating an autophosphorylation site on HER2 that serves as a docking platform for the SH2 domains of the Ras GTPase-activating protein (RasGAP). The net effect is an increase in the intensity and duration of GTP-Ras levels with the overall impact of enhanced HER2 signaling and cell transformation. In conformity to these findings, the HER2 mutant that lacks the SHP2 target site exhibits an enhanced signaling and cell transformation potential. Therefore, SHP2 promotes HER2-induced signaling and transformation at least in part by dephosphorylating a negative regulatory autophosphorylation site. These results suggest that SHP2 might serve as a therapeutic target against breast cancer and other cancers characterized by HER2 overexpression.