1. CPI-17 has recently been identified as a novel protein in vascular smooth muscle. In vitro , its phosphorylation and thiophosphorylation by protein kinase C (PKC) specifically inhibits the type 1 class of protein phosphatases, including myosin light chain (MLC) phosphatase. 2. Both of the phosphorylated CPI-17 states dose-dependently potentiated submaximal contractions at constant [Ca2+] in beta-escin-permeabilized and Triton X-100-demembranated arterial smooth muscle, but produced no effect in intact and less intensely permeabilized (alpha-toxin) tissue. Thiophosphorylated CPI-17 (tp-CPI) induced large contractions even under Ca2+-free conditions and decreased Ca2+ EC50 by more than an order of magnitude. Unphosphorylated CPI-17 produced minimal but significant effects. 3. tp-CPI substantially increased the steady-state MLC phosphorylation to Ca2+ ratios in beta-escin preparations. 4. tp-CPI affected the kinetics of contraction and relaxation and of MLC phosphorylation and dephosphorylation in such a manner that indicates its major physiological effect is to inhibit MLC phosphatase. 5. Results from use of specific inhibitors in concurrence with tp-CPI repudiate the involvement of general G proteins, rho A or PKC itself in the Ca2+ sensitization by tp-CPI. 6. Our results indicate that phosphorylation of CPI-17 by PKC stimulates binding of CPI-17 to and subsequent inhibition of MLC phosphatase. This implies that CPI-17 accounts largely for the heretofore unknown signalling pathway between PKC and inhibited MLC phosphatase.