Metabolic dysfunction-associated fatty liver disease (MAFLD) encompasses a broad spectrum of pathologies, ranging from simple steatosis, or metabolic dysfunction-associated steatotic liver (MASL), to the more advanced metabolic dysfunction-associated steatohepatitis (MASH), characterized by hepatocyte death, ballooning and inflammation and accompanied by variable degrees of fibrosis. The accumulation of effector CD8+ T cells in the livers of obese patients with MAFLD is considered an early contributing factor to liver damage and the progression from MASL to MASH, fibrosis and hepatocellular carcinoma (HCC). The precise mechanisms regulating the activation of liver T cells in MAFLD remain unclear. Here we show that hepatocytes and inflammatory macrophages in MAFLD release H2O2 to oxidise and inactivate protein tyrosine phosphatases (PTPs) in liver CD8+ T cells, including PTPN2 which regulates T cell activation and responses. H2O2 released by hepatocytes and inflammatory macrophages from high-fat diet fed mice enhanced the antigen-induced T cell activation and cytotoxicity ex-vivo, whereas the partial inactivation of PTPN2 in T cells facilitated the progression from MAFL to MASH and fibrosis in high-fat diet fed mice. This was accompanied by a marked hepatic accumulation of antigen-experienced effector CD8+ T cells, overt inflammation and liver damage. In addition, partial PTPN2-deficiency in T cells enhanced the development of HCC in chemical carcinogen (DEN) treated high-fat diet fed mice. Taken together, our results demonstrate that the oxidation and inactivation of T cell PTPs in MAFLD can result in a loss of T cell tolerance, inflammation and liver damage to drive MASH/fibrosis and HCC. These findings establish a new paradigm for redox crosstalk in hepatic pathophysiology.