The recombinant human Vaccinia virus H1-related protein tyrosine phosphatase, (VHR PTPase) possesses intrinsic Tyr and Thr/Ser phosphatase activities. Both activities were abolished by a single amino acid substitution, C124S. When VHR was incubated with a 32P-labeled phosphotyrosine-containing substrate and then rapidly denatured, enzyme-associated 32P was evident following SDS-polyacrylamide gel electrophoresis. The formation of 32P-labeled protein could be blocked in the presence of an unlabeled substrate. VHR-associated 32P was sensitive to iodine but insensitive to pyridine and hydroxylamine. The catalytically inactive C124S mutant would not form a 32P-labeled enzyme. Furthermore, VHR phosphatase could be selectively inactivated by the alkylating agent iodoacetate. The inactivation resulted from the specific covalent modification of Cys124. Collectively these results suggest that a thiol-phosphate enzyme intermediate is formed when Cys124 of VHR accepts a phosphate from the substrate. Our results also demonstrate that the dual specificity phosphatases and the tyrosine-specific PTPases employ similar catalytic mechanisms.