Protein of regenerating liver (PRL)-1, -2, and -3 comprise a subgroup of closely related protein-tyrosine phosphatases featuring a C-terminal prenylation motif conforming to either the consensus sequence for farnesylation, CAAX, or geranylgeranylation, CCXX. Yeast two-hybrid screening for PRL-2-interacting proteins identified the beta-subunit of Rab geranylgeranyltransferase II (betaGGT II). The specific interaction of betaGGT II with PRL-2 but not with PRL-1 or -3 occurred in yeast and HeLa cells. Chimeric PRL-1/-2 molecules were tested for their interaction with betaGGT II, and revealed that the C-terminal region of PRL-2 is required for interaction, possibly the PRL variable region immediately preceeding the CAAX box. Additionally, PRL-2 prenylation is prequisite for betaGGT II binding. As prenylated PRL-2 is localized to the early endosome, we propose that this is where the interaction occurs. PRL-2 is not a substrate for betaGGT II, as isoprenoid analysis showed that PRL-2 was solely farnesylated in vivo. Co-expression of the alpha-subunit (alpha) of GGT II, betaGGT II, and PRL-2 resulted in alpha/betaGGT II heterodimer formation and prevented PRL-2 binding. Expression of PRL-2 alone inhibited the endogenous alpha/betaGGT II activity in HeLa cells. Together, these results indicate that the binding of alphaGGT II and PRL-2 to betaGGT II is mutually exclusive, and suggest that PRL-2 may function as a regulator of GGT II activity.