We have examined protein phosphorylation in the presence of purified mammalian HSP-70 kDa using the phosphoproteins in the rabbit reticulocyte lysate system as a model. Purified HSP-70 added to the rabbit reticulocyte lysate decreased the general protein phosphorylation by 50-80% as measured by PAGE analysis of proteins labelled with gamma-(32P)-ATP. Reduction in protein phosphorylation was not due to the ATPase activity of HSP-70 as measured by thin layer chromatography. The reduction in protein phosphorylation was also not due to the reduced activities of the protein kinases. However, using (32P)-labelled phosphorylase-alpha as a substrate in the phosphatase assay system indicated increases in the activity of protein phosphatase 1(PP-1) and/or 2A (PP-2A) by 20-40% relative to control in the presence of increasing concentrations of HSP-70. Using a variety of activators and inhibitors of the two major protein phosphatases, PP-1 and PP-2A, we found that Mn2+ caused a similar pattern of dephosphorylation of proteins as measured by PAGE analysis. Both okadaic acid and microcystin, two protein phosphatase inhibitors, largely counteracted the HSP-70 effect as measured by gel electrophoresis or when (32P)-labelled phosphorylase-alpha was used as a substrate. We conclude that in this system HSP-70 activates specific protein phosphatases.