The modulation of GABAA receptors by protein kinase C is complex and involves effects on both ion channel function and receptor trafficking. Although PKC regulates receptor cell surface expression the mechanism is not well understood. Using immunofluorescence studies in HEK 293 cells, we demonstrate that activation of PKC by the phorbol ester PMA promotes receptor endocytosis and is dependent on the presence of a gamma subunit. This endocytosis is blocked by the dominant negative dynamin mutant K44A indicating that PKC-induced receptor endocytosis involves the dynamin endocytic pathway. Mutation of a dileucine motif within the receptor beta2 subunit inhibits the effect of PKC activation on receptor endocytosis. Using patch clamp analysis, we show that PKC activation produces a robust inhibition of GABA-gated chloride currents in cells expressing wildtype GABAA receptors, but it is ineffective in modulating receptors lacking the dileucine motif. Furthermore, the introduction into the patch pipette of a 10-amino acid peptide corresponding to the dileucine motif present in the receptor beta2 subunit prevents PKC modulation of wildtype recombinant receptors. Furthermore, in cerebral cortical neuronal slices inclusion of this peptide in the patch pipette prevents PKC modulation of native GABAA receptors. Using limited chymotrypsin digestion assays, we also show that PKC increases receptor internalization in primary cultures of cerebral cortical neurons. Lastly, PKC inhibitors do not block constitutive receptor endocytosis or affect GABA-gated chloride currents suggesting that PKC-dependent phosphorylation is not required for GABAA receptor endocytosis but plays a modulatory role in the process.