Calcineurin (CaN) is the serine/threonine protein phosphatase (phosphatase 2B) that is activated by binding of Ca2+ to its B subunit and to calmodulin (CaM). This paper identifies residues between the catalytic region and the CaM-binding domain of the A subunit as the domain that binds the regulatory B subunit. A purified fusion protein containing residues 328-390 of the A subunit 1) binds CaN B subunit, and 2) inhibits (IC50 = 0.1 microM) the in vitro stimulation of CaN A phosphatase activity by purified CaN B subunit. A synthetic peptide corresponding to residues 341-360 blocked the binding of CaN B to residues 328-390 in the fusion protein, so 4 hydrophobic residues within this region (Val349-Phe350 and Phe356-Val357) were mutated to either Glu (E mutant) or Gln (Q mutant). The wild-type and mutant A subunits were expressed individually or coexpressed with B subunit in Sf9 cells, purified and characterized. The mutant A subunits were similar to wild-type A subunit in terms of basal phosphatase activity (1-3 nmol/min/mg) and activation by Mn2+/CaM. Addition of purified B subunit to purified wild-type A subunit at a 1:1 molar ratio gave a 40-fold increase in phosphatase activity whereas addition of B subunit to either of the mutant A subunits had no effect on phosphatase activity, even at a 3:1 molar excess of B subunit. Furthermore, when wild-type or mutant A subunits were coexpressed with B subunit and purified on CaM-Sepharose, the B subunit co-eluted with the wild-type A subunit but not with either mutant A subunit. These results demonstrate that residues 328-390 in the A subunit bind B subunit and that the mutated hydrophobic residues are essential.