Receptor-like protein-tyrosine phosphatases (RPTPs) form a diverse family of cell surface molecules whose functions remain poorly understood. The LAR subfamily of RPTPs has been implicated in axon guidance and neural development. Here we report the molecular and genetic analysis of the C. elegans LAR subfamily member PTP-3. PTP-3 isoforms are expressed in many tissues in early embryogenesis, and later become localized to neuronal processes and to epithelial adherens junctions. Loss of function in ptp-3 causes low-penetrance defects in gastrulation and epidermal development similar to those of VAB-1 Eph receptor tyrosine kinase mutants. Loss of function in ptp-3 synergistically enhances phenotypes of mutations in the C. elegans Eph receptor VAB-1 and a subset of its ephrin ligands, but does not show specific interactions with several other RTKs or morphogenetic mutants. The genetic interaction of vab-1 and ptp-3 suggests that LAR-like RPTPs and Eph receptors have related and partly redundant functions in C. elegans morphogenesis.