The roles of protein tyrosine phosphatases (PTPs) in differentiation and axon targeting by dorsal root ganglion (DRG) neurons are essentially unknown. The type III transmembrane PTP, PTPRO, is expressed in DRG neurons, and is implicated in the guidance of motor and retinal axons. We examined the role of PTPRO in DRG development and function using PTPRO(-/-) mice. The number of peptidergic nociceptive neurons in the DRG of PTPRO(-/-) mice was significantly decreased, while the total number of sensory neurons appeared unchanged. In addition, spinal pathfinding by both peptidergic and proprioceptive neurons was abnormal in PTPRO(-/-) mice. Lastly, PTPRO(-/-) mice performed abnormally on tests of thermal pain and sensorimotor coordination, suggesting that both nociception and proprioception were perturbed. Our data indicate that PTPRO is required for peptidergic differentiation and process outgrowth of sensory neurons, as well as mature sensory function, and provide the first evidence that RPTPs regulate DRG development.