The activity of N-ethylmaleimide-insensitive phosphatidate phosphohydrolase (PAP-2) was characterized in control, ras-transformed, and tyrosine kinase-(fps) transformed rat fibroblasts. PAP-2 was assayed in two different ways: 1) within its natural membrane using liposomes of phosphatidate and 2) in the presence of sufficient Triton X-100 to solubilize PAP-2, and to form mixed micelles with the phosphatidate. Harvesting the fibroblasts in medium containing orthovanadate and Zn2+ gave up to 3-fold higher PAP-2 activities when measured in the absence, but not in the presence, of Triton X-100. PAP-2-specific activities from both assays increased in the control fibroblasts as the cells reached confluence. Both specific activities were lower in the oncogenically transformed fibroblasts than in controls at all cell densities tested. The specific activities of PAP-2 did not increase with time in culture in transformed cells which continued to divide. The relative increase in activity of phospholipase D after stimulation with serum or phorbol myristate acetate was lower in the transformed fibroblasts compared to control cells. This indicates a coordinated decrease in the phospholipase D/phosphatidate phosphohydrolase pathway at the level of both enzymes in ras and fps transformed fibroblasts. The ratio of the production of diacylglycerol relative to phosphatidate, after stimulation with serum, or phorbol ester, was lower in both transformed fibroblasts relative to the controls. This is compatible with the decreased specific activity of PAP-2 and indicates functional significance for the differences in PAP-2 activity in regulating the balance between the two mitogenic lipids, phosphatidate and diacylglycerol. Control of PAP-2 activity could be an important factor in regulating appropriate signals for cell division.