The phosphorylase phosphatase activity of protein phosphatase 1 (PP1) catalytic subunit from freshly purified rabbit skeletal muscle was inhibited by MnCl2. Prolonged storage or inhibition by nonspecific phosphatase inhibitors ATP, sodium pyrophosphate, and NaF converted the muscle PP1 to a form that required Mn2+ for enzyme activity. Recombinant PP1 catalytic subunit expressed in Escherichia coli was also a Mn2+-dependent enzyme. While native PP1 was inhibited by the phosphoprotein inhibitor I (I-1), with an IC50 of 1 nM, 40-50-fold higher concentrations of I-1 were required to inhibit the Mn2+-dependent PP1 enzymes. Conversion to the Mn2+-dependent state was accompanied by a 20-fold increase in PP1's ability to dephosphorylate and inactivate I-1. Inhibition by thiophosphorylated I-1 established that dephosphorylation does not play a significant role in I-1's reduced potency as an inhibitor of Mn2+-dependent PP1. The Mn2+-dependent PP1 enzymes were poorly inhibited by N-terminal phosphopeptides of I-1, indicating their impaired interaction with the I-1 functional domain. Mutation of a residue conserved in I-1 and DARPP-32, a structurally related PP1 inhibitor, preferentially attenuated I-1's activity as an inhibitor of Mn2+-dependent PP1. These data showed that, in addition to changes in its catalytic properties, Mn2+-dependent PP1 was modified in its interaction with I-1 at a site that was distinct from its catalytic domain. Our studies suggest that conversion to a Mn2+-dependent state alters multiple structural elements in PP1 catalytic subunit that together define its regulation by I-1.