Insulin stimulation of fibroblasts rapidly induces the tyrosine dephosphorylation of proteins of 68 kDa and 125 kDa, in addition to the tyrosine phosphorylation of the insulin receptor beta-chain, insulin receptor substrates 1 and 2, and Shc. Using specific antibodies, the 68 kDa and 125 kDa proteins were identified as paxillin and focal adhesion kinase (pp125FAK) respectively. We have examined whether dephosphorylation of paxillin and pp125FAK requires interaction of the cells with the extracellular matrix. For this, cells were grown on poly(L-lysine) plates, and the tyrosine phosphorylation of pp125FAK and paxillin was increased by addition of lysophosphatidic acid. Under these conditions, insulin still induced the complete dephosphorylation of pp125FAK and paxillin, indicating that this process can occur independently of the interaction of integrins with extracellular matrix proteins. We also studied whether dephosphorylation of pp125FAK and paxillin results from the action of a phosphotyrosine phosphatase. It was found that phenylarsine oxide, a phosphotyrosine phosphatase inhibitor, prevented the insulin-induced dephosphorylation of pp125FAK and paxillin. Furthermore, this insulin-induced dephosphorylation was also impaired in cells expressing a dominant-negative mutant of phosphotyrosine phosphatase 1D (PTP 1D). Thus we have identified paxillin as a target for dephosphorylation by insulin. In addition, we have obtained evidence that the insulin-mediated dephosphorylation of paxillin and pp125FAK requires active PTP 1D.