The catalytic activity and substrate specificity of protein-tyrosine phosphatase alpha (PTPalpha) is primarily controlled by the membrane proximal catalytic domain (D1). The membrane distal (D2) domain of PTPalpha by itself is a genuine PTPase, possessing catalytic activity comparable to that of D1 using aryl phosphates as substrates. Surprisingly, kcat and kcat/Km for the D2-catalyzed hydrolysis of phosphotyrosine-containing peptides are several orders of magnitude reduced in comparison with those of D1. Substitution of the putative general acid/base Glu-690 in D2 by an Asp, which is invariably found in the WPD motifs in all cytoplasmic PTPases and all the D1 domains of receptor-like PTPases, only increases the kcat for D2 by 4-fold. Thus the much reduced D2 activity toward peptide substrates may be due to structural differences in the active sites other than the general acid/base. Alternatively, the D2 domain may have a functional active site with a highly stringent substrate specificity. PTPalpha display modest peptide substrate selectivity and are sensitive to charges adjacent to phosphotyrosine. In the sequence context of DADEpYLIPQQG (where pY stands for phosphotyrosine), the minimal sizes recognized by PTPalpha are either ADEpYLI or DADEpY-NH2.