Whereas positive regulatory events triggered by insulin binding to insulin receptor (IR) have been well documented, the mechanism by which the activated IR is returned to the basal status is not completely understood. Recently studies focused on the involvement of protein tyrosine phosphatases (PTPs) and how they might influence IR signaling. In this study, we examined the possibility that cytosolic PTPepsilon (cytPTPepsilon) is involved in IR signaling. Studies were performed on L6 skeletal muscle cells. cytPTPepsilon was overexpressed by using pBABE retroviral expression vectors. In addition, we inhibited cytPTPepsilon by RNA silencing. We found that insulin induced rapid association of cytPTPepsilon with IR. Interestingly, this association appeared to occur in the plasma membrane and on stimulation with insulin the two proteins internalized together. Moreover, it appeared that almost all internalized IR was associated with cytPTPepsilon. We found that knockdown of cytPTPepsilon by RNA silencing increased insulin-induced tyrosine phosphorylation of IR and IR substrate (IRS)-1 as well as phosphorylation of protein kinase B and glycogen synthase kinase-3 and insulin-induced stimulation of glucose uptake. Moreover, overexpression of wild-type cytPTPepsilon reduced insulin-induced tyrosine phosphorylation of IR, IRS-1, and phosphorylation of protein kinase B and glycogen synthase kinase-3 and insulin-induced stimulation of glucose uptake. Finally, insulin-induced tyrosine phosphorylation of IR and IRS-1 was greater in skeletal muscle from mice lacking the cytPTPepsilon gene than that from wild-type control animals. We conclude that cytPTPepsilon serves as another major candidate negative regulator of IR signaling in skeletal muscle.