The gamma-subunit of retinal rod-outer-segment phosphodiesterase (PDE-gamma) is a multifunctional protein which interacts directly with both of the catalytic subunits of PDE (PDE alpha/beta) and the alpha-subunit of the retinal G (guanine-nucleotide-binding)-protein transducin alpha (T alpha). We have previously reported that the PDE gamma binds to T alpha at residue nos. 24-45 [Morrison. Rider & Takemoto (1987) FEBS Lett. 222, 266-270]. In vitro this results in inhibition of T alpha GTP/GDP exchange [Morrison, Cunnick, Oppert & Takemoto (1989) J. Biol. Chem. 264, 11671-11681]. We now report that the inhibitory region of PDE gamma for PDE alpha/beta occurs at PDE gamma residues 54-87. This binding results in inhibition of either trypsin-solubilized or membrane-bound PDE alpha/beta. PDE gamma which has been treated with carboxypeptidase Y, removing the C-terminus, does not inhibit PDE alpha/beta, but does inhibit T alpha GTP/GDP exchange. Inhibition by PDE gamma can be removed by T alpha-guanosine 5'-[gamma-thio]triphosphate (GTP[S]) addition to membranes. This results in a displacement of PDE gamma, but not in removal of this subunit from the membrane [Whalen, Bitensky & Takemoto (1990) Biochem. J. 265, 655-658]. These results suggest that low levels of T alpha-GTP[S] can result in displacement of PDE gamma from the membrane in vitro as a GTP[S]-T alpha-PDE gamma complex. Further activation by high levels of T alpha-GTP[S] occurs by displacement of PDE gamma from its inhibitory site on PDE alpha/beta, but not in removal from the membrane.