CD148 is a transmembrane tyrosine phosphatase that is expressed at cell junctions. Recent studies have shown that CD148 associates with the cadherin/catenin complex and p120 catenin (p120) may serve as a substrate. However, the role of CD148 in cadherin cell-cell adhesion remains unknown. Therefore, here we addressed this issue using a series of stable cells and cell-based assays. Wild-type (WT) and catalytically inactive (CS) CD148 were introduced to A431D (lacking classical cadherins), A431D/E-cadherin WT (expressing wild-type E-cadherin), and A431D/E-cadherin 764AAA (expressing p120-uncoupled E-cadherin mutant) cells. The effects of CD148 in cadherin adhesion were assessed by Ca2+ switch and cell aggregation assays. Phosphorylation of E-cadherin/catenin complex and Rho family GTPase activities were also examined. Although CD148 introduction did not alter the expression levels and complex formation of E-cadherin, p120, and β-catenin, CD148 WT, but not CS, promoted cadherin contacts and strengthened cell-cell adhesion in A431D/E-cadherin WT cells. This effect was accompanied by an increase in Rac1, but not RhoA and Cdc42, activity and largely diminished by Rac1 inhibition. Further, we demonstrate that CD148 reduces the tyrosine phosphorylation of p120 and β-catenin; causes the dephosphorylation of Y529 suppressive tyrosine residue in Src, a well-known CD148 site, increasing Src activity and enhancing the phosphorylation of Y228 (a Src kinase site) in p120, in E-cadherin contacts. Consistent with these findings, CD148 dephosphorylated both p120 and β-catenin in vitro. The shRNA-mediated CD148 knockdown in A431 cells showed opposite effects. CD148 showed no effects in A431D and A431D/E-cadherin 764AAA cells. In aggregate, these findings provide the first evidence that CD148 promotes E-cadherin adhesion by regulating Rac1 activity concomitant with modulation of p120, β-catenin, and Src tyrosine phosphorylation. This effect requires E-cadherin and p120 association.