We report a novel signaling pathway linking M-2 muscarinic receptors to metabotropic ion channels. Stimulation of heterologously expressed M-2 receptors, but not other G(i)/G(o)-associated receptors (M-4 or alpha(2c)), activates a calcium- and voltage-independent chloride current in Xenopus oocytes. We show that the stimulatory pathway linking M-2 receptors to these chloride channels consists of G beta gamma stimulation of phosphoinositide 3-kinase gamma (PI-3K gamma), formation of phosphatidylinositol 3,4,5-trisphosphate (PIP3), and activation of atypical protein kinase C (PKC). The chloride current is activated in the absence of M-2 receptor stimulation by the injection of PIP3, and PIP3 current activation is blocked by a pseudosubstrate inhibitory peptide of atypical PKC but not other PKCs. Moreover, the current is activated by injection of recombinant PKC zeta at concentrations as low as 1 mM. M-2 receptor-current coupling was disrupted by inhibiton of PI-3K and by injection of beta gamma binding peptides, but it was not affected by expression of dominant negative p85 cRNA. We also show that this pathway mediates M-2 receptor coupling to metabotropic nonselective cation channels in mammalian smooth muscle cells, thus demonstrating the broad relevance of this signaling cascade in neurotransmitter signaling.