Mutations in PKD1 (85%) or PKD2 (15%) account for almost all cases of autosomal dominant polycystic kidney disease (ADPKD). The ADPKD proteins, termed as polycystin-1 (PC1) and polycystin-2 (PC2), interact via their C-termini to form a receptor-ion channel complex whose function and regulation are not fully understood. Here, we report the first phosphorylated residue (Ser(829)) in PC2, whose dephosphorylation is mediated by PC1 binding through the recruitment of protein phosphatase-1 alpha (PP1α). Using a new phosphospecific antibody (pPC2) to this site, we demonstrate that Ser(829) is phosphorylated by Protein kinase A (PKA) but remains constitutively phosphorylated in cells and tissues lacking PC1. cAMP increased pSer(829) basolateral localization in MDCK cells in a time dependent manner and was essential for pronephric development in Xenopus embryos. When constitutively expressed, a complex phenotype associated with enhanced ATP-dependent ER Ca(2+) release and loss of growth suppression was observed in cycling cells. These results reveal a reciprocal functional link between PC1 and PC2 which is critically dependent on their interaction. Unopposed cAMP stimulated hyperphosphorylation of PC2 in the absence of functional PC1 could contribute to cyst initiation in PKD1 patients and represents a new molecular paradigm in understanding ADPKD pathogenesis.