Protein-tyrosine phosphatase 1B (PTP1B) is an ubiquitously expressed enzyme that negatively regulates growth-factor signalling and cell proliferation by binding to and dephosphorylating key receptor tyrosine kinases, such as the insulin receptor. It is unclear how the activity of PTP1B is regulated. Using a yeast two-hybrid assay, a protein inhibitor of activated STAT1 (PIAS1) was isolated as a PTP1B-interacting protein. Here, we show that PIAS1, which functions as a small ubiquitin-like modifier (SUMO) E3 ligase, associates with PTP1B in mammalian fibroblasts and catalyses sumoylation of PTP1B. Sumoylation of PTP1B reduces its catalytic activity and inhibits the negative effect of PTP1B on insulin receptor signalling and on transformation by the oncogene v-crk. Insulin-stimulated sumoylation of endogenous PTP1B results in a transient downregulation of the enzyme; this event does not occur when the endogenous enzyme is replaced with a sumoylation-resistant mutant of PTP1B. These results suggest that sumoylation, which has been implicated primarily in processes in the nucleus and nuclear pore, also modulates a key enzyme–substrate signalling complex that regulates metabolism and cell proliferation.