Two protein tyrosine phosphatase genes, PTP1 and PTP2, are known in Saccharomyces cerevisiae. However, the functions of these tyrosine phosphatases are unknown, because mutations in either or both phosphatase genes have no clear phenotypic effects. In this report, we demonstrate that although ptp2 has no obvious phenotype by itself, it has a profound effect on cell growth when combined with mutations in a novel protein phosphatase gene. Using a colony color sectoring assay, we isolated 25 mutants in which the expression of PTP1 or PTP2 is required for growth. Complementation tests of the mutants showed that they have a mutation in one of three genes. Cloning and sequence determination of one of these gene, PTC1, indicated that it encodes a homolog of the mammalian protein serine/threonine phosphatase 2C (PP2C). The amino acid sequence of the PTC1 product is approximately 35% identical to PP2C. Disruption of PTC1 indicated that the PTC1 function is nonessential. In contrast, ptc1 ptp2 double mutants showed a marked growth defect. To examine whether PTC1 encodes an active protein phosphatase, a glutathione S-transferase (GST)-PTC1 fusion gene was constructed and expressed in Escherichia coli. Purified GST-PTC1 fusion protein hydrolyzed a serine phosphorylated substrate in the presence of the divalent cation Mg2+ or Mn2+. GST-PTC1 also had weak (approximately 0.5% of its serine phosphatase activity) protein tyrosine phosphatase activity.