Fibroblast growth factor (FGF)-induced growth arrest of chondrocytes is a unique cell type-specific response which contrasts with the proliferative response of most cell types and underlies several genetic skeletal disorders caused by activating FGF receptor (FGFR) mutations. We have shown that one of the earliest key events in FGF-induced growth arrest is dephosphorylation of the retinoblastoma protein (Rb) family member p107 by protein phosphatase 2A (PP2A), a ubiquitously expressed multisubunit phosphatase. In this report, we show that the PP2A-B55α holoenzyme (PP2A containing the B55α subunit) is responsible for this phenomenon. Only the B55α (55-kDa regulatory subunit, alpha isoform) regulatory subunit of PP2A was able to bind p107, and this interaction was induced by FGF in chondrocytes but not in other cell types. Small interfering RNA (siRNA)-mediated knockdown of B55α prevented p107 dephosphorylation and FGF-induced growth arrest of RCS (rat chondrosarcoma) chondrocytes. Importantly, the B55α subunit bound with higher affinity to dephosphorylated p107. Since the p107 region interacting with B55α is also the site of cyclin-dependent kinase (CDK) binding, B55α association may also prevent p107 phosphorylation by CDKs. FGF treatment induces dephosphorylation of the B55α subunit itself on several serine residues that drastically increases the affinity of B55α for the PP2A A/C dimer and p107. Together these observations suggest a novel mechanism of p107 dephosphorylation mediated by activation of PP2A through B55α dephosphorylation. This mechanism might be a general signal transduction pathway used by PP2A to initiate cell cycle arrest when required by external signals.