Infection of Escherichia coli with phage lambda gt10 resulted in the appearance of a protein phosphatase with activity towards 32P-labelled casein. Activity reached a maximum near the point of cell lysis and declined thereafter. The phosphatase was stimulated 30-fold by Mn2+, while Mg2+ and Ca2+ were much less effective. Activity was unaffected by inhibitors 1 and 2, okadaic acid, calmodulin and trifluoperazine, distinguishing it from the major serine/threonine-specific protein phosphatases of eukaryotic cells. The lambda phosphatase was also capable of dephosphorylating other substrates in the presence of Mn2+, although activity towards 32P-labelled phosphorylase was 10-fold lower, and activity towards phosphorylase kinase and glycogen synthase 25 50-fold lower than with casein. No casein phosphatase activity was present in either uninfected cells, or in E. coli infected with phage lambda gt11. Since lambda gt11 lacks part of the open reading frame (orf) 221, previously shown to encode a protein with sequence similarity to protein phosphatase-1 and protein phosphatase-2A of mammalian cells [Cohen, Collins, Coulson, Berndt & da Cruz e Silva (1988) Gene 69, 131-134], the results indicate that ORF221 is the protein phosphatase detected in cells infected with lambda gt10. Comparison of the sequence of ORF221 with other mammalian protein phosphatases defines three highly conserved regions which are likely to be essential for function. The first of these is deleted in lambda gt11.