A 150-kDa protein that inhibits phospholipase D (PLD) activity stimulated by ADP-ribosylation factor and phosphatidylinositol 4,5-bisphosphate (PI(4,5)P-2) was previously purified from rat brain. The sequences of peptides derived from the purified PLD inhibitor now identify it as synaptojanin, a nerve terminal protein that has been implicated in the endocytosis of fused synaptic vesicles and shown to be a member of the inositol polyphosphate 5-phosphatase family, Further characterization of the enzymatic properties of synaptojanin now shows that it hydrolyzes only the 5-phosphate from inositol 1,4,5-trisphosphate (I(1,4,5)P-3) and that it does not catalyze the dephosphorylation of either I(1,3,4)P-3 or inositol 1,4-bisphosphate. However, synaptojanin hydrolyzes both the 4- and 5-phosphates of PI(4,5)P-2 and the 4-phosphate of phosphatidylinositol 4-phosphate, converting both compounds to phosphatidylinositol. Magnesium is required for the hydrolysis of I(1,4,5)P-3, but not for that of phosphoinositides, by synaptojanin. The inhibition of PLD by synaptojanin is attributable to its ability to hydrolyze PI(4,5)P-2. Synaptojanin did not inhibit PLD in the absence of PI(4,5)P-2, and the extent of PLD inhibition was related to the extent of PI(4,5)P-2 hydrolysis in substrate Vesicles. It has been proposed that the biosynthesis of PI(4,5)P-2 and the activation of PLD by ADP-ribosylation factor constitute a positive loop to increase rapidly the concentrations of PI(4,5)P-2 and phosphatidic acid (PA) during membrane vesiculation. The PA thus produced, probably together with PI(4,5)P-2, facilitates vesicle coat assembly. The hydrolysis of PI(4,5)P-2, and consequent inhibition of PLD, by synaptojanin might therefore constitute a mechanism to halt the positive loop connecting PI(4,5)P-2 and PA during the endocytotic cycle of synaptic vesicles and serve as a signal for uncoating.