We have constructed a series of point mutations in the highly conserved FLVRES motif of the src homology 2 (SH2) domain of the abl tyrosine kinase. Mutant SH2 domains were expressed in bacteria, and their ability to bind to tyrosine-phosphorylated proteins was examined in vitro. Three mutants were greatly reduced in their ability to bind both phosphotyrosine itself and tyrosine-phosphorylated cellular proteins. All of the mutants that retained activity bound to the same set of tyrosine-phosphorylated proteins as did the wild type, suggesting that binding specificity was unaffected. These results implicate the FLVRES motif in direct binding to phosphotyrosine. When the mutant SH2 domains were inserted into an activated abl kinase and expressed in murine fibroblasts, decreased in vitro phosphotyrosine binding correlated with decreased transforming ability. This finding implies that SH2-phosphotyrosine interactions are involved in transmission of positive growth signals by the nonreceptor tyrosine kinases, most likely via the assembly of multiprotein complexes with other tyrosine-phosphorylated proteins.