The Dbl family guanine nucleotide exchange factors (GEFs) contain a region of sequence similarity consisting of a catalytic Dbl homology (DH) domain in tandem with a pleckstrin homology (PH) domain. PH domains are involved in the regulated targeting of signaling molecules to plasma membranes by protein-protein and/or protein-lipid interactions. Here we show that Dbl PH domain binding to phosphatidylinositol 4,5-bisphosphate and phosphatidylinositol 3,4,5-triphosphate results in the inhibition of Dbl GEF activity on Rho family GTPase Cdc42. Phosphatidylinositol 4,5-bisphosphate binding to the PH domain significantly inhibits the Cdc42 interactive activity of the DH domain suggesting that the DH domain is subjected to the PH domain modulation under the influence of phosphoinositides (PIPs). We generated Dbl mutants unable to interact with PIPs. These mutants retained GEF activity on Cdc42 in the presence of PIPs and showed a markedly enhanced activating potential for both Cdc42 and RhoA in vivo while displaying decreased cellular transforming activity. Immunofluorescence analysis of NIH3T3 transfectants revealed that whereas the PH domain localizes to actin stress fibers and plasma membrane, the PH mutants are no longer detectable on the plasma membrane. These results suggest that modulation of PIPs in both the GEF catalytic activity and the targeting to plasma membrane determines the outcome of the biologic activity of Dbl.