Monocyte cytokines (ie, monokines) induce natural killer (NK) cells to produce interferon-γ (IFN-γ), which is critical for monocyte clearance of infectious pathogens and tumor surveillance. Human CD56^bright NK cells produce far more IFN-γ in response to monokines than do CD56^dim NK cells. The kinases and phosphatases involved in regulating IFN-γ production by monokine-activated NK cells are not clearly identified. SHIP1 is a 5′ inositol phosphatase that dephosphorylates the phosphatidylinositol-3 kinase (PI-3K) product PI3,4,5P₃. Here, we show that constitutive expression of SHIP1 is distinctly lower in CD56^bright NK cells compared with CD56^dim NK cells, suggesting it could be an important negative regulator of IFN-γ production in monokine-activated NK cells. Indeed, overexpression of SHIP1 in CD56^bright NK cells followed by monokine activation substantially lowered IFN-γ production. This effect was not seen when NK cells were infected with a SHIP1 mutant containing an inactive catalytic domain. Finally, NK cells in SHIP1^–/– mice produced more IFN-γ in response to monokines in vivo than did NK cells from wild-type mice. Collectively, these results demonstrate that SHIP1 negatively regulates monokine-induced NK cell IFN-γ production in vitro and in vivo and provide the first molecular explanation for an important functional distinction observed between CD56^bright and CD56^dim human NK subsets.