Receptor-type protein tyrosine phosphatase α (RPTPα) is an important positive regulator of SRC kinase activation and a known promoter of cancer growth, fibrosis, and arthritis. The domain structure of RPTPs comprises an extracellular region, a transmembrane helix, and two tandem intracellular catalytic domains referred as D1 and D2. The D2 domain of RPTPs is believed to mostly play a regulatory function; however, no regulatory model has been established for RPTPα-D2 or other RPTP-D2 domains. Here, we solved the 1.8 Å resolution crystal structure of the cytoplasmic region of RPTPα, encompassing D1 and D2, trapped in a conformation that revealed a possible mechanism through which D2 can allosterically inhibit D1 activity. Using a D2-truncation RPTPα variant and mutational analysis of the D1/D2 interfaces, we show that D2 inhibits RPTPα phosphatase activity and identified a P405FTP408 motif in D1 that mediates the inhibitory effect of D2. Expression of the gain-of-function F406A/T407A RPTPα variant in HEK293T cells enhanced SRC activation, supporting the relevance of our proposed D2-mediated regulation mechanism in cell signaling. There is emerging interest in the development of allosteric inhibitors of RPTPs, but a scarcity of validated allosteric sites for RPTPs. The results of our study not only shed light on the regulatory role of RPTP-D2 domains, but also provide a potentially useful tool for the discovery of chemical probes targeting RPTPα and other RPTPs.,Published under license by The American Society for Biochemistry and Molecular Biology, Inc.