The peptide neurotransmitter Phe-Met-Arg-PheNH2 (FMRFamide) increases outward K+ currents and promotes dephosphorylation of many phosphoproteins in Aplysia sensory neurons. We examined FMRFamide-induced current responses in sensory neurons injected with thiophosphorylated protein phosphate inhibitor-1 and inhibitor-2 (I-1 and I-2), two structurally different vertebrate protein phosphatase-1 (PP1) inhibitors to define a role for PP1 in the physiological actions of FMRFamide. Thiophosphorylated I-1 and I-2 both reduced the amplitude of outward currents elicited by FMRFamide by 50-60% and were as effective as microcystin-LR, which inhibited both PP1 and protein phosphatase-2A in Aplysia neuronal extracts. These data suggested that of the two major neuronal protein serine/threonine phosphatases, FMRFamide utilized primarily PP1 to open serotonin-sensitive K+ (S-K+) channels. Earlier studies showed that a membrane-associated phosphatase regulated S-K+ channels in cell-free patches from sensory neurons. Utilizing its unique substrate specificity and inhibitor sensitivity, we have characterized PP1 as the principal protein phosphatase associated with neuronal plasma membranes. Two protein phosphatase activities (apparent M(r) values of 170,000 and 38,000) extracted from crude membrane preparations from the Aplysia nervous system were shown to be isoforms of PP1. These biochemical and physiological studies suggest that PP1 is preferentially associated with neuronal membranes and that its activity may be required for the induction of outward K+ currents in the Aplysia sensory neurons by FMRFamide.