The growth-retarded (grt) mouse has an autosomal recessive, fetal-onset, severe thyroid hypoplasia related to TSH hyporesponsiveness. Through genetic mapping and complementation experiments, we show that grt is a missense mutation of a highly conserved region of the tyrosylprotein sulfotransferase 2 (Tpst2) gene, encoding one of the two Tpst genes implicated in post-translational tyrosine O-sulfation. We present evidence that the grt mutation leads to a loss of TPST2 activity, and TPST2 isoform has a high degree of substrate preference for TSH receptor (TSHR). The expression of TPST2 can restore TSH-TSHR-mediated cAMP production in fibroblasts derived from grt mice. Therefore, we propose that the tyrosine sulfation of TSHR by TPST2 is crucial for TSH signaling and resultant thyroid gland function.