A 150-kDa protein that inhibits phospholipase D (PLD) activity stimulated by ADP-ribosylation factor and phosphatidylinositol 4,5- bisphosphate (PI(4,5)P2) was previously purified from rat brain. The sequences of peptides derived from the purified PLD inhibitor now identify it as synaptojanin, a nerve terminal protein that has been implicated in the endocytosis of fused synaptic vesicles and shown to be a member of the inositol polyphosphate 5-phosphatase family. Further characterization of the enzymatic properties of synaptojanin now shows that it hydrolyzes only the 5- phosphate from inositol 1,4,5-trisphosphate (I(1,4,5)P3) and that it does not catalyze the dephosphorylation of either I(1,3,4)P3 or inositol 1,4- bisphosphate. However, synaptojanin hydrolyzes both the 4- and 5-phosphates of PI(4,5)P2 and the 4-phosphate of phosphatidylinositol 4-phosphate, converting both compounds to phosphatidylinositol. Magnesium is required for the hydrolysis of I(1,4,5)P3, but not for that of phosphoinositides, by synaptojanin. The inhibition of PLD by synaptojanin is attributable to its ability to hydrolyze PI(4,5)P2. Synaptojanin did not inhibit PLD in the absence of PI(4,5)P2, and the extent of PLD inhibition was related to the extent of PI(4,5)P2 hydrolysis in substrate vesicles. It has been proposed that the biosynthesis of PI(4,5)P2 and the activation of PLD by ADP- ribosylation factor constitute a positive loop to increase rapidly the concentrations of PI(4,5)P2 and phosphatidic acid (PA) during membrane vesiculation. The PA thus produced, probably together with PI(4,5)P2, facilitates vesicle coat assembly. The hydrolysis of PI(4,5)P2, and consequent inhibition of PLD, by synaptojanin might therefore constitute a mechanism to halt the positive loop connecting PI(4,5)P2 and PA during the endocytotic cycle of synaptic vesicles and serve as a signal for uncoating.