Natural killer (NK) cells play a crucial role in immunity, killing virally infected and cancerous cells. The balance of signals initiated upon engagement of activating and inhibitory NK receptors with cognate ligands determines killing or tolerance. Nevertheless, the molecular mechanisms regulating rapid NK cell discrimination between healthy and malignant cells in a heterogeneous tissue environment are incompletely understood. The SHP-1 tyrosine phosphatase is the central negative NK cell regulator that dephosphorylates key activating signaling proteins. Though the mechanism by which SHP-1 mediates NK cell inhibition has been partially elucidated, the pathways by which SHP-1 is itself regulated remain unclear. Here, we show that phosphorylation of SHP-1 in NK cells on the S591 residue by PKC-θ promotes the inhibited SHP-1 ‘folded’ state. Silencing PKC-θ maintains SHP-1 in the active conformation, reduces NK cell activation and cytotoxicity, and promotes tumor progression in vivo. This study reveals a molecular pathway that sustains the NK cell activation threshold through suppression of SHP-1 activity.