AKT pathway has a critical role in mediating signaling transductions for cell proliferation, differentiation and survival. Previous studies have shown that AKT activation is achieved through a series of phosphorylation steps: first, AKT is phosphorylated at Thr-450 by JNK kinases to prime its activation; then, phosphoinositide-dependent kinase 1 phosphorylates AKT at Thr-308 to expose the Ser-473 residue; and finally, AKT is phosphorylated at Ser-473 by several kinases (PKD2 and others) to achieve its full activation. For its inactivation, the PH-domain containing phosphatases dephosphorylate AKT at Ser-473, and protein serine/threonine phosphatase-2A (PP-2A) dephosphorylates it at Thr-308. However, it remains unknown regarding which phosphatase dephosphorylates AKT at Thr-450 during its inactivation. In this study, we present both in vitro and in vivo evidence to show that protein serine/threonine phosphatase-1 (PP-1) is a major phosphatase that directly dephosphorylates AKT to modulate its activation. First, purified PP-1 directly dephosphorylates AKT in vitro. Second, immunoprecipitation and immunocolocalization showed that PP-1 interacts with AKT. Third, stable knock down of PP-1alpha or PP-1beta but not PP-1gamma, PP-2Aalpha or PP-2Abeta by shRNA leads to enhanced phosphorylation of AKT at Thr-450. Finally, overexpression of PP-1alpha or PP-1beta but not PP-1gamma, PP-2Aalpha or PP-2Abeta results in attenuated phosphorylation of AKT at Thr-450. Moreover, our results also show that dephosphorylation of AKT by PP-1 significantly modulates its functions in regulating the expression of downstream genes, promoting cell survival and modulating differentiation. These results show that PP-1 acts as a major phosphatase to dephosphorylate AKT at Thr-450 and thus modulate its functions.