cdc25 controls the activity of the cyclin-p34cdc2 complex by regulating the state of tyrosine phosphorylation of p34cdc2. Drosophila cdc25 protein from two different expression systems activates inactive cyclin-p34cdc2 and induces M phase in Xenopus oocytes and egg extracts. We find that the cdc25 sequence shows weak but significant homology to a phylogenetically diverse group of protein tyrosine phosphatases. cdc25 itself is a very specific protein tyrosine phosphatase. Bacterially expressed cdc25 directly dephosphorylates bacterially expressed p34cdc2 on Tyr-15 in a minimal system devoid of eukaryotic cell components, but does not dephosphorylate other tyrosine-phosphorylated proteins at appreciable rates. In addition, mutations in the putative catalytic site abolish the in vivo activity of cdc25 and its phosphatase activity in vitro. Therefore, cdc25 is a specific protein phosphatase that dephosphorylates tyrosine and possibly threonine residues on p34cdc2 and regulates MPF activation.