We have examined the mechanism by which the transcriptional activity of the cAMP-responsive factor CREB is attenuated following induction with forskolin. Metabolic labeling studies reveal that, after an initial burst of phosphorylation in response to cAMP, CREB is dephosphorylated and transcription of the cAMP-responsive somatostatin gene is correspondingly reduced. The phosphatase inhibitor 1 protein and okadaic acid both prevented the dephosphorylation of CREB at Ser-133 in PC12 cells and also augmented the transcriptional response to cAMP. Of the four Ser/Thr phosphatases described to date, only PP-1 appears to be similarly inhibited by these agents. As PP-1 specifically dephosphorylates CREB at Ser-133 and inhibits cAMP-dependent transcription, we propose that this phosphatase is the major regulator of CREB activity in cAMP-responsive cells.