The chicken proto-oncoprotein c-Src is phosphorylated by p34cdc2 during mitosis concomitant with increased c-Src tyrosine kinase activity. On the basis of indirect evidence, we previously suggested that this is caused by partial dephosphorylation at Tyr-527, the phosphorylation of which suppresses c-Src kinase activity. In support of this hypothesis, we now show that treatment of cells with a protein tyrosine phosphatase inhibitor, sodium vanadate, blocks the mitotic increase in Src kinase activity. Also, we show that an amino-terminal mutation that prevents myristylation (and membrane localization) of c-Src does not interfere with the p34cdc2-mediated phosphorylations but blocks both mitotic dephosphorylation of Tyr-527 (in kinase-defective Src) and stimulation of c-Src kinase activity. Furthermore, in unsynchronized cells, the kinase activity of nonmyristylated c-Src is suppressed by 60% relative to wild-type c-Src, presumably because of increased Tyr-527 phosphorylation. Consistent with this, the Tyr-527 dephosphorylation rate measured in cell homogenates is much higher for wild-type, myristylated c-Src than for nonmyristylated c-Src. Tyr-527 phosphatase activity was primarily associated with the nonsoluble subcellular fraction. These findings suggest that the phosphatase(s) that acts on Tyr-527 is membrane bound and indicate that membrane localization of c-Src is necessary for its mitotic activation by dephosphorylation of Tyr-527.