PTP–PEST is involved in the regulation of sealing ring formation in osteoclasts. In this article, we have shown a regulatory role for PTP–PEST on dephosphorylation of c-Src at Y527 and phosphorylation at Y418 in the catalytic site. Activation of Src in osteoclasts by over-expression of PTP–PEST resulted in the phosphorylation of cortactin at Y421 and WASP at Y294. Also enhanced as a result, is the interaction of Src, cortactin, and Arp2 with WASP. Moreover, the number of osteoclasts displaying sealing ring and bone resorbing activity was increased in response to PTP–PEST over-expression as compared with control osteoclasts. Cells expressing constitutively active-Src (527YΔF) simulate the effects mediated by PTP–PEST. Treatment of osteoclasts with a bisphosphonate alendronate or a potent PTP inhibitor PAO decreased the activity and phosphorylation of Src at Y418 due to reduced dephosphorylation state at Y527. Therefore, Src-mediated phosphorylation of cortactin and WASP as well as the formation of WASP·cortactin·Arp2 complex and sealing ring were reduced in these osteoclasts. Similar effects were observed in osteoclasts treated with an Src inhibitor PP2. We have shown that bisphosphonates could modulate the function of osteoclasts by inhibiting downstream signaling mediated by PTP–PEST/Src, in addition to its effect on the inhibition of the post-translational modification of small GTP-binding proteins such as Rab, Rho, and Rac as shown by others. The promising effects of the inhibitors PP2 and PAO on osteoclast function suggest a therapeutic approach for patients with bone metastases and osteoporosis as an alternative to bisphosphonates. J. Cell. Physiol. 220: 382–393, 2009. © 2009 Wiley-Liss, Inc.