The transforming protein of polyoma virus, middle T antigen, associates with the protein tyrosine kinase pp60c-src, and analysis of mutants of middle T suggests that this complex plays an important role in transformation by polyoma. It has recently been reported that pp60c-src from polyoma virus-transformed cells has enhanced tyrosine kinase activity in vitro. The data presented here confirm these findings and show that the enhanced kinase activity of pp60c-src is due to an increase in the Vmax of the enzyme. Sucrose density gradient analysis demonstrates that only the form of pp60c-src which is bound to middle T antigen is activated. The difference in enzyme activity between pp60c-src from normal and middle T-transformed cells is more marked when the enzyme is prepared from lysates containing the phosphotyrosine protein phosphatase inhibitor, sodium orthovanadate. pp60c-src from middle T transformed cells is unaffected, but pp60c-src from normal cells has reduced kinase activity if dephosphorylation is prevented. The kinase activity of pp60c-src thus appears to be regulated by its degree of phosphorylation at tyrosine, and data are presented which support this hypothesis. pp60c-src is the first example of a protein tyrosine kinase whose activity is inhibited by phosphorylation at tyrosine. Middle T antigen may increase the kinase activity of pp60c-src by preventing phosphorylation at this regulatory site.