Protein phosphatase 5 (PP5) exhibits very low phosphatase activity, which can be stimulated > 25-fold by proteolysis. Since proteolysis cleaves the N-terminal tetratricopeptide repeat (TPR) domain from the catalytic domain, these results indicate that the TPR domain shields the active site. Polyunsaturated fatty acids, such as arachidonic acid, and lipids containing polyunsaturated fatty acids, such as phosphatidylinositol, stimulate both bacterially expressed human and native rabbit PP5 activity > 25-fold towards casein and myelin basic protein. Phosphatidylinositol binds to the TPR domain, and not to the catalytic domain, indicating that activation by polyunsaturated fatty acids is allosteric and that it may occur by movement of the TPR domain to allow substrate access.