Protein phosphatase 2A (PP2A) is an essential eukaryotic serine/threonine phosphatase known to play important roles in cell cycle regulation. Association of different B-type targeting subunits with the heterodimeric core (A/C) enzyme is known to be an important mechanism of regulating PP2A activity, substrate specificity, and localization. However, how the binding of these targeting subunits to the A/C heterodimer might be regulated is unknown. We have used the budding yeast Saccharomyces cerevisiae as a model system to investigate the hypothesis that covalent modification of the C subunit (Pph21p/Pph22p) carboxyl terminus modulates PP2A complex formation. Two approaches were taken. First, S. cerevisiae cells were generated whose survival depended on the expression of different carboxyl-terminal Pph21p mutants. Second, the major S. cerevisiae methyltransferase (Ppm1p) that catalyzes the methylation of the PP2A C subunit carboxyl-terminal leucine was identified, and cells deleted for this methyltransferase were utilized for our studies. Our results demonstrate that binding of the yeast B subunit, Cdc55p, to Pph21p was disrupted by either acidic substitution of potential carboxyl-terminal phosphorylation sites on Pph21p or by deletion of the gene for Ppm1p. Loss of Cdc55p association was accompanied in each case by a large reduction in binding of the yeast A subunit, Tpd3p, to Pph21p. Moreover, decreased Cdc55p and Tpd3p binding invariably resulted in nocodazole sensitivity, a known phenotype of CDC55 or TPD3 deletion. Furthermore, loss of methylation also greatly reduced the association of another yeast B-type subunit, Rts1p. Thus, methylation of Pph21p is important for formation of PP2A trimeric and dimeric complexes, and consequently, for PP2A function. Taken together, our results indicate that methylation and phosphorylation may be mechanisms by which the cell dynamically regulates PP2A complex formation and function.