Protein phosphatase type 1 (PP1) is a major Ser/Thr protein phosphatase that is involved in many cellular processes. The activity of PP1 is controlled by regulatory subunits, many of which are thought to bind to a hydrophobic groove in PP1 via a short consensus sequence termed the V/IXF motif. To test this hypothesis, 11 variants of yeast PP1 (Glc7) were constructed in which one or more of the residues comprising the groove were changed to alanine. These variants were tested for their biological activity in vivo, for their biochemical activity in vitro, and for their ability to associate with three PP1 binding proteins. Five variants are unable to complement the essential function of PP1 in vivo although they are catalytically active in vitro. Many of the mutants are deficient in binding two V/IXF-containing subunits, Gac1 and Reg1, which regulate glycogen accumulation and glucose repression, respectively, but all retain the ability to associate with Sds22, a regulatory subunit that lacks this motif. The subcellular locations at which PP1 normally accumulates (bud neck, nucleolus, spindle pole body) were not occupied by one PP1 variant. Additionally, we provide evidence that mutations in the hydrophobic groove of PP1 affect substrate specificity. Together, these results demonstrate the importance of the hydrophobic groove for the interaction with regulatory subunits, for the proper subcellular localization of PP1 and for the substrate specificity of PP1.