Inhibitor-1 (I-1), a cyclic AMP-regulated phosphoprotein, inhibits protein phosphatase-1 (PP1) activity in response to hormones. The molecular mechanism for PP1 inhibition by I-1 remains unknown. Mutation of nine acidic residues lining a proposed I-1-binding channel in rabbit PP1alpha yielded one mutant (E256A) slightly impaired in its inhibition by I-1, with the IC50 increased by 3-fold, and one mutant (E275R) located in the beta12-beta13 loop that showed 4-fold enhanced inhibition by I-1. Substituting Tyr-272, a proposed binding site for the toxins okadaic acid and microcystin-LR, in the beta12-beta13 loop with Trp, Phe, Asp, Arg, or Ala impaired PP1alpha inhibition by I-1 by 8-10-fold. Chemical mutagenesis of the Saccharomyces cerevisiae PP1 gene (GLC7) yielded 20 point mutations in the PP1 coding region. Two-hybrid analyses and biochemical assays of these yeast enzymes identified four additional residues in the beta12-beta13 loop that were required for PP1 binding and inhibition by I-1. Ten-fold higher concentrations of I-1 were required to inhibit these mutants. Finally, deletion of the beta12-beta13 loop from PP1alpha maintained full enzyme activity, but attenuated inhibition by I-1 by >100-fold. These data identified the beta12-beta13 loop in the PP1 catalytic subunit as a domain that mediates binding and enzyme inhibition by I-1.