Protein phosphatase type-1 (PP-1) has a protease resistant catalytic core M(r) = 35 000 (PP-35K) and a carboxyl terminal segment which affects activity with various substrates. We found that micromolar concentration of a synthetic peptide, corresponding to residues 312-326 of the PP-1 carboxyl terminus (P312-326) that is missing from PP-35K, increased the phosphatase activity of PP-35K with phosphorylase and myosin light chains as substrates by decreasing the apparent K(m) without a change in V(m). Purified PP-1 and PP-35K were inhibited identically by okadaic acid, but peptide P312-326 only stimulated the activity of PP-35K, not full-length PP-1. Other peptides corresponding to the carboxyl terminus of phosphatase-2A or to the amino terminus of PP-1 did not affect the activity of PP-35K. A sequence conserved in PP-1 from different species, Pro-Ile-Thr-Pro-Pro was implicated as the active region because a derivative peptide, Ala-Pro-Ile-Thr-Pro-Pro-Ala, stimulated the activity of PP-35K to the same extent as peptide P312-326 although at higher concentrations. These results indicate that the carboxyl terminus of PP-1 interacts with the catalytic core to modulate its activity, and suggest that the physiological regulation of PP-1 may involve this segment.