Contractility of smooth muscle and non-muscle microfilaments involves phosphorylation of myosin II light chain. Myosin light chain phosphatase (MLCP) is specifically inhibited by the protein kinase C-potentiated inhibitor protein of 17 kDa, called CPI-17, as part of Ca(2+) sensitization of vascular smooth muscle contraction. Phosphorylation of Thr(38) in CPI-17 enhances inhibitory potency toward MLCP over 1000-fold. In this study we mapped regions of CPI-17 required for inhibition and investigated the mechanism using deletion and point mutants. Deletion of either the N-terminal 34 residues or C-terminal 27 residues gave no change in the IC(50) of either phospho- or unphospho-CPI-17. However, further deletion to give CPI-17 proteins of 1-102, 1-89, 1-76, and 1-67, resulted in much higher IC(50) values. The results indicate there is a minimal inhibitory domain between residues 35 and 120. A single Ala substitution at Tyr(41) eliminated phosphorylation-dependent inhibition, and phospho-Thr(38) in the Y41A protein was efficiently dephosphorylated by MLCP itself. The wild type CPI-17 expressed in fibroblast-induced bundling and contraction of actomyosin filaments, whereas expression of the Y41A protein had no obvious effects. Thus, a central domain of CPI-17(35-120) including phospho-Thr(38) is necessary for recognition by myosin phosphatase and Tyr(41) arrests dephosphorylation, thereby producing inhibition.