Protein-tyrosine phosphatase-L1 (PTPL1, also known as FAP-1, PTP1E, PTP-BAS, and PTPN13) is mutated in a significant number of colorectal tumors and may play a role in down-regulating signaling responses mediated by phosphatidylinositol 3-kinase, although the precise substrates are as yet unknown. In this study, we describe a 1.8 Å resolution crystal structure of a fully active fragment of PTPL1 encompassing the catalytic domain. PTPL1 adopts the standard PTP fold, albeit with an unusually positioned additional N-terminal helix, and shows an ordered phosphate in the active site. Interestingly, a positively charged pocket is located near the PTPL1 catalytic site, reminiscent of the second phosphotyrosine binding site in PTP1B, which is required to dephosphorylate peptides containing two adjacent phosphotyrosine residues (as occurs for example in the activated insulin receptor). We demonstrate that PTPL1, like PTP1B, interacts with and dephosphorylates a bis-phosphorylated insulin receptor peptide more efficiently than monophosphorylated peptides, indicating that PTPL1 may down-regulate the phosphatidylinositol 3-kinase pathway, by dephosphorylating insulin or growth factor receptors that contain tandem phosphotyrosines. The structure also reveals that four out of five PTPL1 mutations found in colorectal cancers are located on solvent-exposed regions remote from the active site, consistent with these mutants being normally active. In contrast, the fifth mutation, which changes Met-2307 to Thr, is close to the active site cysteine and decreases activity significantly. Our studies provide the first molecular description of the PTPL1 catalytic domain and give new insight into the function of PTPL1.