Physiological studies of ion channel regulation have implicated the Ser/Thr protein phosphatase 5 (PP5) as an effector of Rac1 GTPase signaling, but direct biochemical evidence for PP5 regulation by Rac1 is lacking. In this study we used immunoprecipitation, in vitro binding, cellular fractionation, and immunofluorescence techniques to show that the tetratricopeptide repeat domain of PP5 interacts specifically and directly with active Rac1. Consequently, activation of Rac1 promoted PP5 translocation to the plasma membrane in intact cells and stimulated PP5 phosphatase activity in vitro. In contrast, neither constitutively active RhoA-V14 nor dominant negative Rac1N17, which preferentially binds GDP and retains an inactive conformation, bound PP5 or stimulated its activity. In addition, Rac1N17 and Rac1(PBRM), a mutant lacking the C-terminal polybasic region required for Rac1 association with the membrane, both failed to cause membrane translocation of PP5. Mutation of predicted contact residues in the PP5 tetratricopeptide repeat domain or within Rac1 also disrupted co-immunoprecipitation of Rac1-PP5 complexes and membrane translocation of PP5. Specific binding of PP5 to activated Rac1 provides a direct mechanism by which PP5 can be stimulated and recruited to participate in Rac1-mediated signaling pathways.