Light-activated cyclic GMP-phosphodiesterase (PDE) is the key effector enzyme of vertebrate photoreceptor cells which regulates the level of the internal transmitter cyclic GMP. PDE consists of catalytic P alpha and P beta subunits, and two copies of inhibitory P gamma subunit. The two P gamma subunits block the enzyme's activity in the dark and are removed by the alpha-subunit of transducin (alpha 1) upon light-activation of photoreceptor cells. Here we have examined the role of various regions of P gamma, the N-terminal, the central cationic and the C-terminal regions, in interaction with the catalytic subunits of PDE. N-Terminal truncation of P gamma (12-87-P gamma) did not change the potency of PDE inhibition, and thus we conclude that the P gamma N-terminal region is not critical for P gamma-P alpha beta interaction. The central region, 24-46-P gamma, participates in interaction with the catalytic P alpha beta subunits. A synthetic peptide corresponding to this site inhibited approximately 50% of trypsin-activated PDE (tPDE) (Ki approximately 15 microM) and competed with P gamma for inhibition of tPDE. We demonstrated, by using h.p.l.c. gel filtration, that 125I-Tyr-24-46-P gamma peptide bound with high affinity to tPDE, but not to P alpha beta gamma 2. The C-terminal region of 46-87-P gamma was found to be the major region involved in inhibition of PDE. It fully inhibited tPDE with a Ki of approximately 0.8 microM. It also bound to tPDE, but not P alpha beta gamma 2, in h.p.l.c. gel-filtration experiments. In addition, P gamma was cross-linked by p-phenylenedimaleimide to both P alpha and P beta, as was shown by using subunit-specific anti-P alpha, -P beta and -P gamma antibodies. Cys68 of P gamma, which presumably participates in cross-linking, is located near the P gamma C-terminus. These data provide evidence for two regions of P gamma that interact with, and inhibit, P alpha beta. The central region, 24-46 P gamma, is important in binding, but inhibits PDE only weakly, whereas the C-terminal region is most important for PDE inhibition. These results help to explain the well-known fact that P gamma trypsin-activation and C-terminal truncation both lead to PDE activation. Furthermore, our findings on the mechanism of PDE inhibition of P gamma are relevant for understanding the mechanism of PDE activation by transducin.