SH2-containing protein tyrosine phosphatase 1 (SHP1) is an important negative regulator in cytokine-mediated signal transduction and cell cycling. Recent studies have demonstrated that SHP1 promoter methylation is frequently observed in gastric adenocarcinoma tissues. In this in vitro study, we attempted to reveal promoter hypermethylation and to investigate effects of SHP1 in gastric carcinoma cell lines. We observed that both gene and protein expression of SHP1 were negative in 8 of 10 gastric cancer cell lines (SNU-1, SNU-5, SNU-16, SNU-638, SNU-719, MKN-28, MKN-45, AGS). Methylation-specific PCR (MSP) showed a methylation-specific band only in the 10 gastric cancer lines. Bisulfite pyrosequencing in AGS, MKN-28, and SNU-719 cells indicated that methylation frequency was as high as 94.4, 92.6, and 94.5 %, respectively, in the three cell lines. Treatment of SNU-719, MKN-28, and AGS cells with 5-Aza-2'-deoxycytidine (5-Aza-dc) led to re-expression of SHP1 in these cells. Introduction of exogenous SHP1 in SNU-719 and MKN-28 cells by transient transfection substantially downregulated protein expression of constitutive phosphor-Janus kinase 2 (JAK2) (tyrosine 1007/1008) and phosphor-signal transducers and activators of transcription 3 (STAT3) (tyrosine 705), which in turn decreased expression of STAT3 target genes including those encoding cyclin D1, MMP-9, VEGF-1, and survivin. Induction of SHP1 significantly inhibited cell proliferation, migration and invasion in SNU-719 and MKN-28 cells. Taken together, epigenetic silencing of SHP1 is frequently caused by promoter hypermethylation in gastric carcinoma cells. Overexpression of SHP1 downregulates the JAK2/STAT3 pathway to modulate various target genes and inhibit cell proliferation, migration, and invasion in gastric cancer cells.