We present results of laser absorption spectroscopy and two-pulse photon echo decoherence measurements on the lowest 4I15/2 to lowest 4I13/2 transition in Er3+: KTiOPO4 (KTP - potassium titanyl phosphate) for the optical transition located at 1537.238 nm. This transition was found to have an inhomogeneous absorption linewidth of 950 MHz and pronounced polarization dependence. Two-pulse photon echo decay measurements as a function of applied magnetic field strength at 1.9 K revealed a narrow homogeneous linewidth of 2.5 kHz at 0.2 T that increased to 5.8 kHz at 1.2 T and then decreased to 1.6 kHz at 4.5 T. This behavior was successfully described by decoherence due to Er3+-Er3+ magnetic dipole interactions. Significant superhyperfine coupling of Er3+ spins to the nuclear moments of ions in the host lattice was observed, modulating the photon echo decay at low magnetic fields and limiting the effective homogenous linewidth at high fields. Combined with the well-established potential of KTP for fabrication of high-quality optical waveguides and integrated non-linear frequency conversion, our results suggest that Er3+:KTP is a promising material system for practical spectral hole burning, signal processing, and quantum information applications.