The light-stimulated production of inositol triphosphate (IP3), via hydrolysis of phosphatidylinositol bisphosphate (PIP2), can be demonstrated in an in vitro preparation of isolated distal segments of squid photoreceptors. The retina is labeled with [3H]inositol (Szuts, E. Z., Wood, S. F., Reid, M. S., and Fein, A. (1986) Biochem. J. 240, 929-932), and the rhodopsin-containing distal segments are isolated in artificial cytosol. Within 2 s after a flash, IP3 levels increase 200% (corresponding to an intracellular increase of approximately 5 microM), and the lipid precursor PIP2 decreases by 50%. Inositol bisphosphate (IP2) levels increase later, as a breakdown product of IP3. IP3 response is light-dependent, saturating when 0.5% of the rhodopsin is photoactivated. Guanosine-5'-O-(3-thiotriphosphate (GTP gamma S) binding demonstrates that the plasma membrane of most of the photoreceptor distal segments is intact or only transiently permeable. Membrane permeabilization enhances light-activated GTP gamma S binding but abolishes the light-activated IP3 production. Receptor-mediated production of IP3 is believed to be the result of a receptor-G-protein-phospholipase C cascade (i.e. Cockcroft, S., and Gomperts, B. D. (1985) Nature 314, 534-536). To test for G-proteins, we incubated the photoreceptors in AlF4- (an activator of G-proteins) in the dark. IP3 and IP2 were produced with a corresponding decrease in PIP2. Incubation with GTP or GTP gamma S, in hypotonic buffer, which causes transient leakiness, increased dark levels by IP3 by 50%. Addition of GTP in isotonic buffer enhanced the light-induced increase of IP3. These results localize the light-stimulated phospholipase C activity to the distal segments and suggest that a G-protein couples rhodopsin to phospholipase C.