CD8⁺ T cell exhaustion is a state of dysfunction acquired in chronic viral infection and cancer, characterized by the formation of Slamf6⁺ progenitor exhausted and Tim-3⁺ terminally exhausted subpopulations through unknown mechanisms. Here we establish the phosphatase PTPN2 as a new regulator of the differentiation of the terminally exhausted subpopulation that functions by attenuating type 1 interferon signaling. Deletion of Ptpn2 in CD8⁺ T cells increased the generation, proliferative capacity and cytotoxicity of Tim-3⁺ cells without altering Slamf6⁺ numbers during lymphocytic choriomeningitis virus clone 13 infection. Likewise, Ptpn2 deletion in CD8⁺ T cells enhanced Tim-3⁺ anti-tumor responses and improved tumor control. Deletion of Ptpn2 throughout the immune system resulted in MC38 tumor clearance and improved programmed cell death-1 checkpoint blockade responses to B16 tumors. Our results indicate that increasing the number of cytotoxic Tim-3⁺CD8⁺ T cells can promote effective anti-tumor immunity and implicate PTPN2 in immune cells as an attractive cancer immunotherapy target.