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Hypoxia is a trigger of VEGF expression, the primary cause of retinal pathologies characterized by neovascularization. During hypoxia, transcription factors such as STAT3 and HIF-1 promote the increase in VEGF expression. Octreotide, a somatostatin receptor 2 (sst2)-preferring agonist, reduces retinal VEGF expression and neovascularization. To investigate the intracellular pathways linking sst2 activation to the inhibition of hypoxia-induced VEGF up-regulation, we used pharmacological approaches and siRNA in mouse retinal explants cultured in normoxia or hypoxia. In hypoxic explants in which STAT3 or HIF-1 was inhibited, we observed the existence of reciprocal interactions between STAT3 and HIF-1, which synergistically induced VEGF expression. Octreotide prevented hypoxia-induced activation of STAT3 and HIF-1, and the downstream increase in VEGF expression, as evaluated in hypoxic explants treated with pharmacological inhibitors of STAT3 or HIF-1 and in normoxic explants in which pharmacological activators of STAT3 or HIF-1 were used to mimic a hypoxia-like response. The effect of octreotide on STAT3 activation is in part indirect, through the blockade of VEGFR-2 phosphorylation. The effect of octreotide on STAT3, HIF-1, VEGFR-2, and VEGF required Src homology region 2 domain-containing phosphatase 1 (SHP-1). In hypoxic extracts, octreotide induced SHP-1 phosphorylation and activation, and inhibiting SHP-1 abolished the octreotide effect on STAT3, HIF-1, VEGFR-2, and VEGF. The central role of SHP-1 in the modulation of STAT3 and HIF-1 was confirmed in normoxic explants in which pharmacologically activated SHP-1 prevented the effect of STAT3 or HIF-1 activation. Immunohistochemical studies showed that under hypoxia sst2 and VEGF are expressed by retinal vessels, thus indicating a possible direct effect of octreotide on VEGF-containing endothelial cells. These data clarify the mechanism by which octreotide prevents hypoxia-induced VEGF up-regulation and support the effectiveness of octreotide in treatment of oxygen-induced retinopathies. These results may have implications in designing therapies targeting STAT3 and/or HIF-1 aimed at preventing retinal neovascularization. Copyright © 2012 Pathological Society of Great Britain and Ireland. Published by John Wiley & Sons, Ltd.