The 'native' Mg-ATP-dependent protein phosphatase was isolated from rabbit skeletal muscle by a procedure that avoided the use of organic solvents or heating at 90-100 degrees C. The purified enzyme was composed of two major proteins (molecular mass 37 kDa and 31 kDa) that were present in a 1:1 molar ratio, and accounted for 70-80% of the material. The 37-kDa component comigrated with the catalytic subunit of protein phosphatase-1, and its identity with this protein was established by peptide mapping, and by its cleavage to the characteristic 34-kDa and 33-kDa fragments following incubation with chymotrypsin. The 31-kDa protein comigrated with inhibitor-2, and its identity with this protein was established by its heat stability, ability to inhibit protein phosphatase-1 at nanomolar concentrations, and its phosphorylation on a threonine residue by glycogen synthase kinase 3. It is therefore concluded that the 'native' Mg-ATP-dependent protein phosphatase is composed of the catalytic subunit of protein phosphatase-1 (37 kDa) and inhibitor-2 (31 kDa) in a 1:1 molar ratio. The 'native' Mg-ATP-dependent protein phosphatase had virtually identical properties to the enzyme reconstituted from inhibitor-2 and the 37-kDa catalytic subunit of protein phosphatase-1. Each preparation had a similar specific activity and was inhibited by identical concentrations of inhibitor-1. Both enzymes could be activated by incubation with glycogen synthase kinase-3 and Mg-ATP, or by Mn2+ and trypsin (or chymotrypsin). However, Mn2+ alone, or proteinase digestion in the absence of Mn2+, failed to activate either preparation. Incubation with glycogen synthase kinase-3 and Mg-ATP did not dissociate the 'native' or 'reconstituted' enzymes, whereas treatment with Mn2+ and trypsin decreased their apparent molecular masses from 70 kDa to 35 kDa. Incubation with chymotrypsin converted the 'native' and 'reconstituted' enzymes to forms that required preincubation with glycogen synthase kinase-3, Mg-ATP and inhibitor-2, in order to exhibit catalytic activity. The Mg-ATP-dependent protein phosphatase reconstituted from the 'nicked' 33-kDa catalytic subunit dissociated upon activation, in contrast to the enzyme reconstituted from the undegraded 37-kDa catalytic subunit. The results suggest that a 3-4-kDa fragment at one end of the polypeptide is involved in strengthening interaction between the undegraded 37-kDa catalytic subunit and the phosphorylated form of inhibitor-2.