The nonreceptor tyrosine phosphatase Shp2 (PTPN11) has been implicated in tyrosine kinase, cytokine, and integrin receptor signaling. We show here that conditional mutation of Shp2 in neural crest cells and in myelinating Schwann cells resulted in deficits in glial development that are remarkably similar to those observed in mice mutant for Neuregulin-1 (Nrg1) or the Nrg1 receptors, ErbB2 and ErbB3. In cultured Shp2 mutant Schwann cells, Nrg1-evoked cellular responses like proliferation and migration were virtually abolished, and Nrg1-dependent intracellular signaling was altered. Pharmacological inhibition of Src family kinases mimicked all cellular and biochemical effects of the Shp2 mutation, implicating Src as a primary Shp2 target during Nrg1 signaling. Together, our genetic and biochemical analyses demonstrate that Shp2 is an essential component in the transduction of Nrg1/ErbB signals.