Four lines of evidence presented here suggest that the activity of cholesterol 7 alpha-hydroxylase in rat liver is modulated by changes in its phosphorylation state. 1) Livers were homogenized and microsomes were isolated and washed in the presence of either 50 mM NaCl or 50 mM NaF, the latter an inhibitor of phosphoprotein phosphatases. The 7 alpha-hydroxylase activity of microsomes prepared with NaF was 80% greater than that of microsomes prepared with NaCl. 2) Incubation of 10,000 X g supernatants from rat liver for 20 min at 37 degrees C in the absence of 50 mM KF decreased the activity of microsomal cholesterol 7 alpha-hydroxylase by 52%. No significant change was seen in the presence of KF. 3) 7 alpha-Hydroxylase activity fell by 40% when microsomes were incubated with bacterial alkaline phosphatase compared to incubation of microsomes with phosphatase that was inhibited by phosphate and EDTA. 4) 7 alpha-Hydroxylase activity increased by 22% when phosphatase-treated microsomes were incubated for 40 min at 37 degrees C with 1 mM MgATP, 50 microM cAMP, and 200 units of cAMP-dependent protein kinase.