The tissue inhibitors of metalloproteinases (TIMPs) regulate matrix metalloproteinase activity required for cell migration/invasion associated with cancer progression and angiogenesis. TIMPs also modulate cell proliferation in vitro and angiogenesis in vivo independent of their matrix metalloproteinase inhibitory activity. Here, we show that TIMP-2 mediates G1 growth arrest in human endothelial cells through de novo synthesis of the cyclin-dependent kinase inhibitor p27Kip1. TIMP-2-mediated inhibition of Cdk4 and Cdk2 activity is associated with increased binding of p27Kip1 to these complexes in vivo. Protein-tyrosine phosphatase inhibitors or expression of a dominant negative Shp-1 mutant ablates TIMP-2 induction of p27Kip1. Finally, angiogenic responses to fibroblast growth factor-2 and vascular endothelial growth factor-A in "motheaten viable" Shp-1-deficient mice are resistant to TIMP-2 inhibition, demonstrating that Shp-1 is an important negative regulator of angiogenesis in vivo.