The Src homology 2-containing phosphotyrosine phosphatase (SHP2) is primarily a positive effector of receptor tyrosine kinase signaling. However, the molecular mechanism by which SHP2 effects its biological function is unknown. In this report, we provide evidence that defines the molecular mechanism and site of action of SHP2 in the epidermal growth factor-induced mitogenic pathway. We demonstrate that SHP2 acts upstream of Ras and functions by increasing the half-life of activated Ras (GTP-Ras) in the cell by interfering with the process of Ras inactivation catalyzed by Ras GTPase-activating protein (RasGAP). It does so by inhibition of tyrosine phosphorylation-dependent translocation of RasGAP to the plasma membrane, to its substrate (GTP-Ras) microdomain. Inhibition is achieved through the dephosphorylation of RasGAP binding sites at the level of the plasma membrane. We have identified Tyr992 of the epidermal growth factor receptor (EGFR) to be one such site, since its mutation to Phe renders the EGFR refractory to the effect of dominant-negative SHP2. To our knowledge, this is the first report to outline the site and molecular mechanism of action of SHP2 in EGFR signaling, which may also serve as a model to describe its role in other receptor tyrosine kinase signaling pathways.