Abstract β-catenin plays a dual role both as a key effector in the regulation of adherens junctions and as a transcriptional coactivator. Tyrosine phosphorylation of β-catenin is implicated as a means for its release from E-cadherin complexes and correlates with enhanced transcriptional activity. However, it remains unclear whether or not tyrosine phosphorylated β-catenin degrades slower or faster than its unphosphorylated form or transactivates the downstream target genes differently. We have recently demonstrated that tyrosine phosphatase SHP-1 negatively regulates the nuclear transcriptional function of β-catenin. The mechanism by which SHP-1 specifically inhibits β-catenin/TCF transcriptional activity remains, however, to be elucidated. Herein, we demonstrate that inhibition of tyrosine phosphatases with pervanadate induced both c-src-dependent tyrosine phosphorylation and nuclear translocation of β-catenin. Moreover, ectopic expression of SHP-1 but not the inactive form of SHP-1 (C453S) inhibited src-induced tyrosine phosphorylation of β-catenin on tyrosines 86 and 654. SHP-1 expression and mutations of tyrosine-86 and tyrosine-654 to phenylalanine significantly and similarly decreased the transactivation potential of β-catenin on the TOPFLASH reporter. SHP-1 expression as well as mutations of tyrosine-86 and tyrosine-654 to phenylalanine also significantly interfered with the association of β-catenin with TBP. Mutations of tyrosine-86 and/or tyrosine-654 did not markedly alter β-catenin stability whereas SHP-1 expression promoted proteasomal β-catenin degradation through a GSK3β-dependent mechanism. In conclusion, SHP-1 negatively regulates β-catenin transcriptional activity i) by dephosphorylating β-catenin on tyrosines 86 and 654, ii) by impairing its capacity to interact with the basal transcriptional factor TBP and iii) by promoting β-catenin degradation in a GSK3β-dependent manner.