Allergic inflammation and severe allergic reactions (anaphylaxis) are important in allergen induced diseases. Bacterial products such as lipopolysaccharide (LPS) are ubiquitous and can facilitate allergen induced Th2 immune responses. Phosphatase SHP-1 is critical in regulating immunological homeostasis and in allergen induced Th2 immune responses in the lung. However, the mechanisms underlying the initiation of allergic inflammation and allergen induced anaphylaxis are still not completely elucidated and it is unclear whether SHP-1 plays any role in LPS-induced airway inflammation and in allergen-induced anaphylaxis. In this study we tested the hypothesis that phosphatase SHP-1 plays an important role in allergic inflammation and anaphylaxis and determined whether its effects are through regulation of mast cell functions. SHP-1 deficient (mev/+ and mev/mev) and mast cell deficient (Kit(W-sh)) mice were examined in their responses to LPS airway stimulation and to ovalbumin (OVA) allergen induced systemic anaphylaxis. Compared to wild type mice, mev/+ mice had significantly enhanced LPS induced airway inflammation and OVA induced anaphylactic responses, including hypothermia and clinical symptoms. These changes were mast cell dependent as Kit(W-sh) mice had reduced responses whereas adoptive transfer of mast cells restored the responses. However, T and B cells were not involved and macrophages did not play a significant role in LPS induced airway inflammation. Interestingly, basophil differentiation from SHP-1 deficient bone marrow cells was significantly reduced. These findings provided evidence that through regulation of mast cell functions SHP-1 plays a critical role as a negative regulator in allergic inflammation and in allergen induced anaphylaxis. In addition, SHP-1 seems to be required for normal basophil development.