SHP-1, an src homology 2 (SH2) domain containing protein tyrosine phosphatase, functions as a negative regulator of signaling downstream of cytokine receptors, receptor tyrosine kinases and receptor complexes of the immune system. Dephosphorylation of receptors and/or receptor-associated kinases has been described as the mechanism for the function of SHP-1. Here we demonstrate a novel mechanism by which SHP-1 down-regulates the Janus kinase–2 (Jak2)/signal transducer and activator of transcription-5 (Stat5) pathway downstream of the prolactin receptor (PRLR) and the erythropoietin receptor (EPOR) in a catalytic activity–independent manner. Structural/functional analysis of SHP-1 defined the C-terminal tyrosine residues (Y278, Y303, Y538, Y566) within growth factor receptor–bound protein 2 (Grb-2) binding motif to be responsible for delivering the inhibitory effects. Our results further indicate that these tyrosine residues, via recruitment of the adaptor protein Grb-2, are required for targeting the inhibitory protein suppressor of cytokine signaling–1 (SOCS-1) to Jak2 kinase. Finally, loss of SOCS-1 expression in SOCS-1^–/– mouse embryonic fibroblast (MEF) cells led to attenuation in SHP-1 function to down-regulate PRL-induced Stat5 activation. All together, our results indicate that SHP-1 inhibits PRLR and EPOR signaling by recruitment and targeting of SOCS-1 to Jak2, highlighting a new mechanism of SHP-1 regulation of cytokine-receptor signaling.