Among single-spanning transmembrane receptors (sTMRs), two guanylyl cyclase receptors, GC1 and GC2, are critically important during phototransduction in vertebrate retinal photoreceptor cells. Ca(2+)-free forms of guanylyl cyclase-activating proteins (GCAPs) stimulate GCs intracellularly by a molecular mechanism that is not fully understood. To gain further insight into the mechanism of activation and specificity among these proteins, for the first time, several soluble and active truncated GCs and fusion proteins between intracellular domains of GCs and full-length GCAPs were generated. The GC activity of myristoylated GCAP--(437-1054)GC displayed typical [Ca(2+)] dependence, and was further enhanced by ATP and inhibited by guanylyl cyclase inhibitor protein (GCIP). The myristoyl group of GCAP1 appeared to be critical for the inhibition of GCs at high [Ca(2+)], even without membranes. In contrast, calmodulin (CaM)--(437-1054)GC1 fusion protein was inactive, but could be stimulated by exogenous GCAP1. In a series of experiments, we showed that the activation of GCs by linked GCAPs involved intra- and intermolecular mechanisms. The catalytically productive GCAP1--(437-1054)GC1 complex can dissociate, allowing binding and stimulation of the GC1 fusion protein by free GCAP1. This suggests that the intramolecular interactions within the fusion protein have low affinity and are mimicking the native system. We present evidence that the mechanism of GC activation by GCAPs involves a dimeric form of GCs, involves direct interaction between GCs and GCAPs, and does not require membrane components. Thus, fusion proteins may provide an important advance for further structural studies of photoreceptor GCs and other sTMRs with and without different forms of regulatory proteins.