Few tyrosine phosphatases support, rather than inhibit, survival of tumor cells. We present genetic evidence that receptor-type protein-tyrosine phosphatase (RPTP)-ε performs such a function, as cells from mammary epithelial tumors induced by activated Neu in mice genetically lacking RPTPε appeared morphologically less transformed and exhibited reduced proliferation. We show that at the molecular level, RPTPε activates Src, a known collaborator of Neu in mammary tumorigenesis. Lack of RPTPε reduced Src activity and altered Src phosphorylation in tumor cells; RPTPε dephosphorylated and activated Src; and Src bound a substrate-trapping mutant of RPTPε. The altered morphology of tumor cells lacking RPTPε was corrected by exogenous Src and exogenous RPTPε or RPTPα; exogenous activated Src corrected also the growth rate phenotype. Together, these results suggest that the altered morphology of RPTPε-deficient tumor cells is caused by reduced Src activity, caused, in turn, by lack of RPTPε. Unexpectedly, the phenotype of RPTPε-deficient tumor cells occurs despite expression of the related RPTPα, indicating that endogenous RPTPα does not compensate for the absence of RPTPε in this case. We conclude that RPTPε is a physiological activator of Src in Neu-induced mammary tumors and suggest that pharmacological inhibition of phosphatases that activate Src may be useful to augment direct pharmacological inhibition of Src.