XA21 encodes a rice immune receptor that confers robust resistance to most strains of the Gram-negative bacterium Xanthomonas oryzae pv. oryzae (Xoo). XA21-mediated immunity is triggered by recognition of a small protein called RaxX-sY (required for activation of XA21-mediated immunity X, tyrosine-sulfated) secreted by Xoo. To identify components regulating XA21-mediated immunity, we generated and screened a mutant population of fast-neutron-mutagenized rice expressing Ubi:Myc-XA21 for those susceptible to Xoo. Here, we report the characterization of one of these rice mutants, named sxi2 (suppressor of XA21-mediated immunity-2). Whole-genome sequencing revealed that sxi2 carries a deletion of the PALADIN (PALD) gene encoding a protein with three putative protein tyrosine phosphatase-like domains (PTP-A, -B, and -C). Expression of PALD in the sxi2 genetic background was sufficient to complement the susceptible phenotype, which requires the catalytic cysteine of the PTP-A active site to restore resistance. PALD co-immunoprecipitated with the full-length XA21 protein, whose levels are positively regulated by the presence of the PALD transgene. Furthermore, we foundd that sxi2 retains many hallmarks of XA21-mediated immunity, similar to the wild type. These results reveal that PALD, a previously uncharacterized class of phosphatase, functions in rice innate immunity, and suggest that the conserved cysteine in the PTP-A domain of PALD is required for its immune function.