The nonreceptor isoform of tyrosine phosphatase epsilon (cyt-PTPe) supports osteoclast adhesion and activity in vivo, leading to increased bone mass in female mice lacking PTPe (EKO mice). The structure and organization of the podosomal adhesion structures of EKO osteoclasts are abnormal; the molecular mechanism behind this is unknown. We show here that EKO podosomes are disorganized, unusually stable, and reorganize poorly in response to physical contact. Phosphorylation and activities of Src, Pyk2, and Rac are decreased and Rho activity is increased in EKO osteoclasts, suggesting that integrin signaling is defective in these cells. Integrin activation regulates cyt-PTPe by inducing Src-dependent phosphorylation of cyt-PTPe at Y638. This phosphorylation event is crucial because wild-type - but not Y638F - cyt-PTPe binds and further activates Src and restores normal stability to podosomes in EKO osteoclasts. Increasing Src activity or inhibiting Rho or its downstream effector Rho kinase in EKO osteoclasts rescues their podosomal stability phenotype, indicating that cyt-PTPe affects podosome stability by functioning upstream of these molecules. We conclude that cyt-PTPe participates in a feedback loop that ensures proper Src activation downstream of integrins, thus linking integrin signaling with Src activation and accurate organization and stability of podosomes in osteoclasts.