An arachidonic acid-stimulated Ser/Thr phosphatase activity was detected in soluble extracts prepared from rat pituitary clonal GH4C1 cells, rat or bovine brain, and bovine heart. The enzyme activity was purified to homogeneity from bovine brain as a monomer with a Mr of 63,000 and a specific activity of 32 nmol of Pi released per min/mg of protein when assayed in the presence of 10 microM phosphocasein in the absence of lipid. Arachidonic acid stimulated activity 4-14-fold, with half-maximal stimulation at 50-100 microM, when assayed in the presence of a variety of phosphosubstrates including casein, reduced carboxamidomethylated and maleylated lysozyme, myelin basic protein, and histone. Oleic acid, linoleic acid, and palmitoleic acid also stimulated activity; however, saturated fatty acids and alcohol or methyl ester derivatives of fatty acids did not significantly affect activity. The lipid-stimulated phosphatase was identified as the bovine equivalent of protein phosphatase 5 or a closely related homolog by sequence analysis of proteolytic fragments generated from the purified enzyme. When recombinant rat protein phosphatase 5 was expressed as a cleavable glutathione S-transferase fusion protein, the affinity-purified thrombin-cleaved enzyme exhibited a specific activity and sensitivity to arachidonic acid similar to those of the purified bovine brain enzyme. These results suggest that protein phosphatase 5 may be regulated in vivo by a lipid second messenger or another endogenous activator.