The Ah receptor binds aryl hydrocarbons such as 2,3,7,8-tetrachlorodibenzo-p-dioxin (TCDD) with high affinity. After binding aryl hydrocarbons, the receptor releases the 90-kDa heat shock protein and forms a dimer with the Arnt protein capable of binding at xenobiotic-responsive elements (XREs) and stimulating the transcription of genes involved in the metabolism of aryl hydrocarbons. The activity of the Ah receptor/ Arnt dimer can be decreased by treatments causing the down-regulation of protein kinase C and decreasing the nuclear accumulation of the receptor. Incubation with acid phosphatase or with alkaline phosphatase has been reported to block XRE binding. Thus the literature suggests that phosphorylation regulates Ah receptor activity by affecting DNA binding and/or nuclear transport. A reporter plasmid containing two XREs was used to investigate the effects of phosphatase inhibitors on TCDD-dependent transcription by the Hepa-1 mouse liver cell line. The inhibitors calyculin A and okadaic acid caused two- to threefold increases in TCDD-dependent transcription at concentrations capable of selectively inhibiting protein phosphatase 1 and protein phosphatase 2A. The inhibitor cyclosporin A doubled TCDD-dependent transcription at a concentration capable of selectively inhibiting protein phosphatase 2B. All three of the phosphatase inhibitors increased TCDD-dependent transcription without affecting transcription in the absence of TCDD. Nuclear extracts were prepared from cells treated with concentrations of okadaic acid or cyclosporin A which substantially stimulated TCDD-dependent transcription. Neither of the inhibitors significantly increased the level of TCDD-dependent XRE binding in the extracts. GAL4-Arnt fusion proteins were used to further investigate whether the phosphatase inhibitors affected a step other than DNA binding. Okadaic acid treatment specifically increased the ability of a GAL4 fusion protein containing the Arnt PAS and transactivation domains to stimulate transcription. These results suggest that serine/threonine-specific protein phosphatases can act at a level subsequent to XRE binding to inhibit the ability of the Ah receptor/Arnt dimer to stimulate transcription.