Abstract The tyrosine phosphatase Src homology 2-containing phosphatase 1 (SHP-1) is a key negative regulator of TCR-mediated signaling. Previous studies have shown that in T cells a fraction of SHP-1 constitutively localizes to membrane microdomains, commonly referred to as lipid rafts. Although this localization of SHP-1 is required for its functional regulation of T cell activation events, how SHP-1 is targeted to the lipid rafts was unclear. In this study, we identify a novel, six-amino acid, lipid raft-targeting motif within the C terminus of SHP-1 based on several biochemical and functional observations. First, mutations of this motif in the context of full-length SHP-1 result in the loss of lipid raft localization of SHP-1. Second, this motif alone restores raft localization when fused to a mutant of SHP-1 (SHP-1 ΔC) that fails to localize to rafts. Third, a peptide encompassing the 6-mer motif directly binds to phospholipids whereas a mutation of this motif abolishes lipid binding. Fourth, whereas full-length SHP-1 potently inhibits TCR-induced tyrosine phosphorylation of specific proteins, expression of a SHP-1-carrying mutation within the 6-mer motif does not. Additionally, although SHP-1 ΔC was functionally inactive, the addition of the 6-mer motif restored its functionality in inhibiting TCR-induced tyrosine phosphorylation. Finally, this 6-mer mediated targeting of SHP-1 lipid rafts was essential for the function of this phosphatase in regulating IL-2 production downstream of TCR. Taken together, these data define a novel 6-mer motif within SHP-1 that is necessary and sufficient for lipid raft localization and for the function of SHP-1 as a negative regulator of TCR signaling.