Light-activated cyclic GMP-phosphodiesterase (PDE) is the key effector enzyme of vertebrate photoreceptor cells which regulates the level of the internal transmitter cyclic GMP. PDE consists of catalytic P-alpha and P-beta subunits, and two copies of inhibitory P-gamma subunit. The two P-gamma subunits block the enzyme's activity in the dark and are removed by the alpha-subunit of transducin (alpha(t)) upon light-activation of photoreceptor cells. Here we have examined the role of various regions of P-gamma, the N-terminal, the central cationic and the C-terminal regions, in interaction with the catalytic subunits of PDE. N-terminal truncation of P-gamma (12-87-P-gamma) did not change the potency of PDE inhibition, and thus we conclude that the P-gamma N-terminal region is not critical for P-gamma-P-alpha-beta interaction. The central region, 24-46-P-gamma, participates in interaction with the catalytic P-alpha-beta-subunits. A synthetic peptide corresponding to this site inhibited approximately 50% of tryspin-activated PDE (tPDE) (K(i) approximately 15-mu-M) and competed with P-gamma for inhibition of tPDE. We demonstrated, by using h.p.l.c. gel filtration, that I-125-Tyr-24-46-P-gamma peptide bound with high affinity to tPDE, but not to P-alpha-beta-gamma(2). The C-terminal region of 46-87-P-gamma was found to be the major region involved in inhibition of PDE. It fully inhibited tPDE with a K(i) of approximately 0.8-mu-M. It also bound to tPDE, but not P-alpha-beta-gamma(2), in h.p.l.c. gel-filtration experiments. In addition, P-gamma was cross-linked by p-phenylenedimaleimide to both P-alpha and P-beta, as was shown by using subunit-specific anti-P-alpha, -P-beta and -P-gamma-antibodies. Cys68 of P-gamma, which presumably participates in cross-linking, is located near the P-gamma C-terminus. These data provide evidence for two regions of P-gamma that interact with, and inhibit, P-alpha-beta. The central region, 24-46-P-gamma, is important in binding, but inhibits PDE only weakly, whereas the C-terminal region is most important for PDE inhibition. These results help to explain the well-known fact that P-gamma-trypsin-activation and C-terminal truncation both lead to PDE activation. Furthermore, our findings on the mechanism of PDE inhibition of P-gamma are relevant for understanding the mechanism of PDE activation by transducin.