A clone encoding the catalytic subunit of a protein phosphatase from Saccharomyces cerevisiae was isolated. Except for replacement of IIe-245 by Met the structure of the phosphatase was identical to that encoded by PPH3 (Ronne, H., Carlberg, M., Hu, G. Z. and Nehlin, J. O. (1991). Mol. Cell. Biochem.11, 4876–4884) and exhibited 63% sequence identity to PPX cloned from a rabbit liver cDNA library (Brewis, N. D., Street, A. J., Prescott, A. R. and Cohen, P. T. W. (1993). EMBO J.12, 987–996). Expression of active enzyme was achieved in Escherichia coli mutants which were generated by a genetic selection based on functional complementation of bacterial phosphoserine phosphatase. Though some of the properties of PPH3 resembled those of protein phosphatase 2A and PPX, others were different. PPH3 exhibited lower sensitivity against inhibition by okadaic acid, showed different substrate specificity and required a divalent cation (Mn2+ was preferred before Mg2+ and Ca2+) for activity when assayed with phospho-histone as a substrate. However, 25% of maximum activity was observed in the absence of divalent cations when the peptide LRRAS(P)LG was used as substrate. The PPH3-protein was also identified by chromatography of extracts from S. cerevisiae on DEAE–cellulose. Protein immunoreactive with an antiserum raised against the non-conserved N-terminal 53 amino acids of PPH3 was coeluted with a single peak of LRRAS(P)LG dephosphorylating activity.