Using the Geodia cydonium system, we showed that after incubation of competent sponge cells in the presence of lectin, phospholipase A2 was released from the cells. The substrates for this enzyme, phosphatidylethanolamine and phosphatidylcholine, were identified in the extracellular material of sponge tissue. In addition, the phospholipase A2 inhibitor calelectrin was identified by immunobiochemical techniques; this molecule was associated with the aggregation factor. Reconstitution experiments strongly suggested that phospholipase A2 catalyzed the release of arachidonic acid, which is then taken up by the cells. Intracellularly, arachidonic acid was metabolized primarily to prostaglandin E2. Inhibition studies revealed that prostaglandin E2 is involved in the ultimate increase of DNA synthesis. These findings suggest that the phospholipase A2-arachidonic acid system is involved in the matrix-initiated signal transduction pathway in sponges.