Protein phosphatase 5 (PP5) is a 58-kDa novel phosphoseryl/phosphothreonyl protein phosphatase. It is ubiquitously expressed in all mammalian tissues examined, with a high level in the brain, but little is known about its physiological substrates. We found that this phosphatase dephosphorylated recombinant tau phosphorylated with cAMP-dependent protein kinase and glycogen synthase kinase-3beta, as well as abnormally hyperphosphorylated tau isolated from brains of patients with Alzheimer's disease. The specific activity of PP5 toward tau was comparable to those reported with other protein substrates examined to date. The PP5 activity toward tau was stimulated by arachidonic acid by 30- to 45-fold. Immunostaining demonstrated that PP5 was primarily cytoplasmic in PC12 cells and in neurons of postmortem human brain tissue. A small pool of PP5 associated with microtubules. Expression of active PP5 in PC12 cells resulted in reduced phosphorylation of tau, suggesting that PP5 can also dephosphorylate tau in cells. These results suggest that PP5 plays a role in the dephosphorylation of tau and might be involved in the molecular pathogenesis of Alzheimer's disease.