PAG/Cbp (hereafter named PAG) is a transmembrane adaptor molecule found in lipid rafts. In resting human T cells, PAG is tyrosine phosphorylated and associated with Csk, an inhibitor of Src-related protein tyrosine kinases. These modifications are rapidly lost in response to T-cell receptor (TCR) stimulation. Overexpression of PAG was reported to inhibit TCR-mediated responses in Jurkat T cells. Herein, we have examined the physiological relevance and the mechanism of PAG-mediated inhibition in T cells. Our studies showed that PAG tyrosine phosphorylation and association with Csk are suppressed in response to activation of normal mouse T cells. By expressing wild-type and phosphorylation-defective (dominant-negative) PAG polypeptides in these cells, we found that the inhibitory effect of PAG is dependent on its capacity to be tyrosine phosphorylated and to associate with Csk. PAG-mediated inhibition was accompanied by a repression of proximal TCR signaling and was rescued by expression of a constitutively activated Src-related kinase, implying that it is due to an inactivation of Src kinases by PAG-associated Csk. We also attempted to identify the protein tyrosine phosphatases (PTPs) responsible for dephosphorylating PAG in T cells. Through cell fractionation studies and analyses of genetically modified mice, we established that PTPs such as PEP and SHP-1 are unlikely to be involved in the dephosphorylation of PAG in T cells. However, the transmembrane PTP CD45 seems to play an important role in this process. Taken together, these data provide firm evidence that PAG is a bona fide negative regulator of T-cell activation as a result of its capacity to recruit Csk. They also suggest that the inhibitory function of PAG in T cells is suppressed by CD45. Lastly, they support the idea that dephosphorylation of proteins on tyrosine residues is critical for the initiation of T-cell activation.