We have investigated the Rac-dependent mechanism of KCNH2 channel stimulation by thyroid hormone in a rat pituitary cell line, GH(4)C(1), with the patch-clamp technique. Here we present physiological evidence for the protein serine/threonine phosphatase, PP5, as an effector of Rac GTPase signaling. We also propose and test a specific molecular mechanism for PP5 stimulation by Rac-GTP. Inhibition of PP5 with the microbial toxin, okadaic acid, blocked channel stimulation by thyroid hormone and by Rac, but signaling was restored by expression of a toxin-insensitive mutant of PP5, Y451A, which we engineered. PP5 is unique among protein phosphatases in that it contains an N-terminal regulatory domain with three tetratricopeptide repeats (TPR) that inhibit its activity. Expression of the TPR domain coupled to GFP blocked channel stimulation by the thyroid hormone. We also show that the published structures of the PP5 TPR domain and the TPR domain of p67, the Rac-binding subunit of NADPH oxidase, superimpose over 92 alpha carbons. Mutation of the PP5 TPR domain at two predicted contact points with Rac-GTP prevents the TPR domain from functioning as a dominant negative and blocks the ability of Y451A to rescue signaling in the presence of okadaic acid. PP5 stimulation by Rac provides a unique molecular mechanism for the antagonism of Rho-dependent signaling through protein kinases in many cellular processes, including metastasis, immune cell chemotaxis, and neuronal development.