The anion-exchange band 3 protein is the main erythrocyte protein that is phosphorylated by tyrosine kinase. To study the regulation of band 3 phosphorylation, we examined phosphotyrosine phosphatase (PTP) activity in the human erythrocyte. We show that the human erythrocyte membrane contains a band 3-associated neutral PTP which is activated by Mg2+ and inhibited by Mn2+ and vanadate. The PTP is active in the intact cell and in the isolated membrane. A major fraction of the PTP is tightly bound to the membrane and can be extracted from it by Triton X-100; a minor part is associated with the Triton X-100-insoluble cytoskeleton. The behaviour of the PTP parallels that of band 3, the major fraction of which is extractable by detergents with a minor fraction being anchored to the cytoskeleton. Moreover, band 3 is co-precipitated when the PTP is immunoprecipitated from solubilized membranes, and PTP is co-precipitated when band 3 is immunoprecipitated. The PTP appears to be related to PTP1B (identified using an antibody to an epitope in its catalytic domain and by molecular mass). The system described here has a unique advantage for PTP research, since it allows the study of the interaction of a PTP with an endogenous physiological substrate that is present in substantial amounts in the cell membrane. The membrane-bound, band 3-associated, PTP may play a role in band 3 function in the erythrocyte and in other cells which have proteins analogous to band 3.