In nucleus basalis neurons, substance P (SP) causes a slow excitation, mediated through a pertussis toxin-insensitive G protein, by suppressing an inward rectifier K+ channel. Here we report that SP applied outside the patch pipette inhibited the single-channel activity, recorded on-cell, of the inward rectifier. The PKC inhibitors staurosporine and PKC(19-36) suppressed this effect in whole-cell mode and in on-cell single-channel mode. A diacylglycerol analog mimicked the SP effect, and PKC(19-36) suppressed this analog effect. SP irreversibly suppressed the inward rectifier in neurons treated with okadaic acid. These results indicate that a diffusible messenger mediates the SP effect, that its signal transduction involves phosphorylation by PKC, and that dephosphorylation by a serine/threonine protein phosphatase mediates its recovery.