The γ-subunit of retinal rod-outer-segment phosphodiesterase (PDE-γ) is a multifunctional protein which interacts directly with both of the catalytic subunits of PDE (PDEα/β) and the α-subunit of the retinal G (guanine-nucleotide-binding)-protein transducin α (Tα). We have previously reported that the PDEγ binds to Tα at residue nos. 24-45 [Morrison, Rider & Takemoto (1987) FEBS Lett. 222, 266-270]. In vitro this results in inhibition of Tα GTP/GDP exchange [Morrison, Cunnick, Oppert and Takemoto (1989) J. Biol. Chem. 264, 11671-11681]. We now report that the inhibitory region of PDEγ for PDEα-1β occurs at PDEγ residues 54-87. This binding results in inhibition of either trypsin-solubilized or membrane-bound PDEα/β. PDEγ which has been treated with carboxypeptidase Y, removing the C-terminus, does not inhibit PDEα/β, but does inhibit Ta GTP/GDP exchange. Inhibition by PdEγ can be removed by Tα-guanosine 5'-[γ-thio]triphosphate (GTP[S]) addition to membranes. This results in a displacement of PDEγ, but not in removal of this subunit from the membrane [Whalen, Bitensky and Takemoto (1990) Biochem. J. 265, 655-658]. These results suggest that low levels of Tα-GTP[S] can result in displacement of PDEγ from the membrane in vitro as a GTP[S]-Tα-PDEγ complex. Further activation by high levels of Tα-GTP[S] occurs by displacement of PDEγ from its inhibitory site on PDEα/β, but not in removal from the membrane.