Phospho-DARPP-32 (where DARPP-32 is dopamine- and cAMP-regulated phosphoprotein, Mr 32,000), its homolog, phospho-inhibitor-1, and inhibitor-2 are potent inhibitors (IC50 approximately 1 nM) of the catalytic subunit of protein phosphatase-1 (PP1). Our previous studies have indicated that a region encompassing residues 6-11 (RKKIQF) and phospho-Thr-34, of phospho-DARPP-32, interacts with PP1. However, little is known about specific regions of inhibitor-2 that interact with PP1. We have now characterized in detail the interaction of phospho-DARPP-32 and inhibitor-2 with PP1. Mutagenesis studies indicate that within DARPP-32 Phe-11 and Ile-9 play critical roles, with Lys-7 playing a lesser role in inhibition of PP1. Pro-33 and Pro-35 are also important, as is the number of amino acids between residues 7 and 11 and phospho-Thr-34. For inhibitor-2, deletion of amino acids 1-8 (I2-(9-204)) or 100-204 (I2-(1-99)) had little effect on the ability of the mutant proteins to inhibit PP1. Further deletion of residues 9-13 (I2-(14-204)) resulted in a large decrease in inhibitory potency (IC50 approximately 800 nM), whereas further COOH-terminal deletion (I2-(1-84)) caused a moderate decrease in inhibitory potency (IC50 approximately 10 nM). Within residues 9-13 (PIKGI), mutagenesis indicated that Ile-10, Lys-11, and Ile-13 play critical roles. The peptide I2-(6-20) antagonized the inhibition of PP-1 by inhibitor-2 but had no effect on inhibition by phospho-DARPP-32. In contrast, the peptide D32-(6-38) antagonized the inhibition of PP1 by phospho-DARPP-32, inhibitor-2, and I2-(1-120) but not I2-(85-204). These results indicate that distinct amino acid motifs contained within the NH2 termini of phospho-DARPP-32 (KKIQF, where italics indicate important residues) and inhibitor-2 (IKGI) are critical for inhibition of PP1. Moreover, residues 14-84 of inhibitor-2 and residues 6-38 of phospho-DARPP-32 share elements that are important for interaction with PP1.