Inositol 1,4,5-trisphosphate (InsP3) is rapidly formed in squid photoreceptors in response to light, where it is converted sequentially into inositol bisphosphate (InsP2) and inositol monophosphate (InsP1). All of the InsP3 appears to be degraded to inositol 1,4-bisphosphate via an InsP3-phosphatase, which is characterized in this study. The enzyme is water-soluble and present in the light-transducing distal segments of squid photoreceptors. It has a Km of 50 microM for InsP3, requires Mg++ for its activity, is maximally active at neutral pH, specifically hydrolyses the 5-phosphate and is inhibited by 2,3-diphosphoglycerate. In these respects, InsP3-phosphatase of squid is very similar to the enzymes of other cells. Since no InsP4 or more highly phosphorylated inositols are found in squid photoreceptors, the InsP3-phosphatase may be important in the regulation of InsP3 concentration within these cells.