A sphingomyelin cycle has been identified whereby the action of certain extracellular agents results in reversible sphingomyelin hydrolysis and the concomitant generation of ceramide. Moreover, a cell-permeable ceramide, C2-ceramide (N-acetylsphingosine), is a potent modulator of cell proliferation and differentiation. We report herein that C2-ceramide, C6-ceramide, and natural ceramides activate a cytosolic serine/threonine protein phosphatase in a dose-dependent manner. Initial activation is observed at concentrations of ceramide as low as 0.1 microM with peak response occurring at 5-10 microM. However, other closely related sphingolipids, sphingosine and sphingomyelin, were largely inactive. Ceramide-stimulated phosphatase was inhibited by okadaic acid, an inhibitor of protein phosphatases, with an IC50 of 0.1-1 nM, depending on the concentration of ceramide. Ceramide-stimulated phosphatase was insensitive to Mg2+ and Mn2+ cations. Using sequential anion exchange chromatography, ceramide-stimulated phosphatase activity could be resolved from ceramide-nonresponsive phosphatases. The activity of partially purified enzyme was stimulated 3.5-fold by ceramide. The identification of a phosphatase as a molecular target for the action of ceramide defines a novel intracellular signaling pathway with potential roles in the regulation of cell proliferation and differentiation.