A combinatorial library method was developed to systematically profile the substrate specificity of protein phosphatases toward phosphoseryl (pS) and phosphothreonyl (pT) peptides. Application of this method and a previously reported phosphotyrosyl (pY) library screening technique to dual-specificity phosphatase (DUSP) VH1 of vaccinia virus revealed that VH1 is highly active toward both pS/pT and pY peptides. VH1 exhibits different and more stringent sequence specificity toward pS/pT than pY substrates. Unlike previously characterized protein tyrosine phosphatases (PTPs), the activity and specificity of VH1 are primarily determined by the amino acid residues C-terminal to the pS, pT, or pY residue. In contrast, the mammalian VH1-related (VHR) DUSP has intrinsically low catalytic activity toward pS and pT substrates, suggesting that its primary physiological function is to dephosphorylate pY residues in substrate proteins. This method is applicable to other DUSPs and protein-serine/threonine phosphatases, and the substrate specificity data will be useful for identifying the physiological substrates of these enzymes.