Clathrin-coated pits are sites of concentration of ligand-bound signaling receptors. Several such receptors are known to recruit, bind, and activate the heterodimeric phosphatidylinositol-3-kinase, resulting in the generation of phosphatidylinositol 3,4, 5-trisphosphate. We report here that dioctanoyl-phosphatidylinositol-3,4,5-P3 binds specifically and saturably to soluble AP-2 and with greater affinity to AP-2 within assembled coat structures. Soluble -myo-inositol hexakisphosphate shows converse behavior. Binding to bovine brain clathrin-coated vesicles is evident only after detergent extraction. These observations and evidence for recognition of the diacylglyceryl backbone as well as the inositol phosphate headgroup are consistent with AP-2 interaction with membrane phosphoinositides in coated vesicles and with soluble inositol phosphates in cytoplasm. A discrete binding domain is identified near the N terminus of the AP-2 alpha subunit, and an expressed fusion protein containing this sequence exhibits specific, high affinity binding that is virtually identical to the parent protein. This region of the AP-2 alpha sequence also shows the greatest conservation between a Caenorhabditis elegans homolog and mammalian alpha, consistent with a function in recognition of an evolutionarily unchanging low molecular weight ligand. Binding of phosphatidylinositol 3,4, 5-trisphosphate to AP-2 inhibits the protein's clathrin binding and assembly activities. These findings are discussed in the context of the potential roles of phosphoinositides and AP-2 in the internalization and trafficking of cell surface receptors.