Although originally considered toxic, hydrogen sulfide (H2S) has been implicated in mediating various biological processes. Nevertheless, its cellular targets and mode of action are not well understood. Protein Tyrosine Phosphatases (PTPs), which regulate numerous signal transduction pathways, utilize an essential Cys residue at the active site, which is characterized by a low pKa and is susceptible to reversible oxidation. Here, we report that PTP1B, the founding member of this enzyme family, was reversibly inactivated by H2S, in vitro and in vivo, via sulfhydration of the active site Cys residue. Unlike oxidized PTP1B, the sulfhydrated enzyme was preferentially reduced by thioredoxin in vitro, compared to glutathione or dithiothreitol. Sulfhydration of the active site Cys in PTP1B in cells required the presence of cystathionine-γ-lyase (CSE), a critical enzyme in H2S production, and resulted in inhibition of phosphatase activity. Suppression of CSE decreased H2S production and decreased the phosphorylation on Tyr619, and activation, of PERK [protein kinase-like endoplasmic reticulum (ER) kinase] in response to ER stress. PERK, which phosphorylates the eukaryotic translational initiation factor 2 (eIF2α) leading to attenuation of protein translation, was a direct substrate of PTP1B. In addition, CSE knockdown also led to activation of SRC, previously shown to be mediated by PTP1B. These effects of suppressing H2S production on the response to ER stress were abrogated by a small molecule inhibitor of PTP1B. Together, these data define a signaling function for H2S in inhibiting PTP1B activity and thereby promoting PERK activity during the response to ER stress.