Carbonic anhydrase isozyme III (CAIII) is unique among the carbonic anhydrases because it demonstrates phosphatase activity. CAIII forms a disulfide link between glutathione and two of its five cysteine residues, a process termed S-glutathiolation. Glutathiolation of CAIII occurs in vivo and is increased during aging and under acute oxidative stress. We show that glutathiolation serves to reversibly regulate the phosphatase activity of CAIII. Glutathiolation of Cys-186 is required for phosphatase activity, while glutathiolation of Cys-181 blocks activity. Phosphotyrosine is the preferred substrate, although phosphoserine and phosphothreonine can also be cleaved. Thus, glutathiolation is a reversible covalent modification that can regulate CAIII, a phosphatase that may function in the cellular response to oxidative stress.