Updated project metadata. Inhibition of VE-PTP, an endothelial receptor type tyrosine phosphatase, triggers phosphorylation of the tyrosine kinase receptor Tie-2, which leads to the suppression of inflammation-induced vascular permeability. Analyzing the underlying mechanism, we show here that inhibition of VE-PTP and activation of Tie-2 induce tyrosine phosphorylation of FGD5, a GTPase exchange factor (GEF) for Cdc42, and stimulate translocation of this GEF to cell contacts. Interfering with the expression of FGD5 blocked the junction stabilizing effect of VE-PTP inhibition in vitro and in vivo. Likewise, FGD5 was required for strengthening of cortical actin bundles and inhibiting radial stress fiber formation, which were each stimulated by VE-PTP inhibition. We identified Y820 of FGD5 as the direct substrate for VE-PTP. Inhibition of VE-PTP could no longer stabilize endothelial junctions or activate Cdc42 if endothelial cells expressed a Y820F point mutated version of FGD5. In contrast, FGD5-Y820F was still recruited to endothelial cell contacts. Thus, activation of FGD5 is a two-step process that comprises membrane recruitment and phosphorylation of Y820. These steps are necessary for the junction stabilizing effect that is stimulated by VE-PTP inhibition and Tie-2 activation.