Electrophysiological recordings on retinal rod cells, horizontal cells and on-bipolar cells indicate that exogenous nitric oxide (NO) has neuromodulatory effects in the vertebrate retina. We report here endogenous NO formation in mammalian photoreceptor cells. Photoreceptor NO synthase resembled the neuronal NOS type I from mammalian brain. NOS activity utilized the substrate L-arginine (Km = 4 microM) and the cofactors NADPH, FAD, FMN and tetrahydrobiopterin. The activity showed a complete dependence on the free calcium concentration ([Ca2+]) and was mediated by calmodulin. NO synthase activity was sufficient to activate an endogenous soluble guanylyl cyclase that copurified in photoreceptor preparations. This functional coupling was strictly controlled by the free [Ca2+] (EC50 = 0.84 microM). Activation of the soluble guanylyl cyclase by endogenous NO was up to 100% of the maximal activation of this enzyme observed with the exogenous NO donor compound sodium nitroprusside. This NO/cGMP pathway was predominantly localized in inner and not in outer segments of photoreceptors. Immunocytochemically, we localized NO synthase type I mainly in the ellipsoid region of the inner segments and a soluble guanylyl cyclase in cell bodies of cone photoreceptor cells. We conclude that in photoreceptors endogenous NO is functionally coupled to a soluble guanylyl cyclase and suggest that it has a neuromodulatory role in visual transduction and in synaptic transmission in the outer retina.