Natural killer (NK) cells are powerful tools of immune defense against viral infections and tumor development. NK cells are regulated by a balance between activating and inhibitory signals. Engagement of inhibitory receptors antagonizes activating pathways through the recruitment of the protein tyrosine phosphatase SHP-1 at the NK immunological synapse (NKIS). Until recently, only the signaling molecule VAV1 was identified as a direct substrate of SHP-1 in human NK cells. Since SHP-1 activity is the major mechanism preventing NK cell responses, it is critical to determine whether additional substrates of SHP-1 exist and whether additional molecular mechanisms downregulate NK cell cytotoxicity. In the present study we demonstrate, using multidisciplinary approaches which include FRET analysis, that in response to KIR receptor engagement, SHP-1 and the E3 ubiquitin ligases c-Cbl and Cbl-b negatively regulate the linker for the activation of T cells (LAT) and phospholipase Cγ (PLCγ)1/2. LAT dephosphorylation by SHP-1 abrogated PLCγ1/2 recruitment to NKIS, decreasing NK cell cytotoxicity. Furthermore, LAT ubiquitylation via c-Cbl and Cbl-b following NK cell inhibition leads to its degradation and to the downregulation of NK cell activation. Expression of an ubiquitylation resistant LAT, or gene silencing of the Cbls, significantly increased NK cell killing of inhibitory target cells, converting the inhibitory NK cell response into an activating one. These mechanisms serve as key checkpoints in tuning NK cell activation threshold. This study, in addition to elucidating how NK cells can rapidly tune their activation threshold in the tumor microenvironment, may have far reaching implications for immunotherapy.