The actin-regulatory protein villin is tyrosine phosphorylated and associates with phospholipase C-gamma(1) (PLC-gamma(1)) in the brush border of intestinal epithelial cells. To study the mechanism of villin-associated PLC-gamma(1) activation, we reconstituted in vitro the tyrosine phosphorylation of villin and its association with PLC-gamma(1). Recombinant villin was phosphorylated in vitro by the nonreceptor tyrosine kinase c-src or by expression in the TKX1 competent cells that carry an inducible tyrosine kinase gene. Using in vitro binding assays, we demonstrated that tyrosine-phosphorylated villin associates with the COOH-terminal Src homology 2 (SH2) domain of PLC-gamma(1). The catalytic activity of PLC-gamma(1) was inhibited by villin in a dose-dependent manner with half-maximal inhibition at a concentration of 12.4 microM. Villin inhibited PLC-gamma(1) activity by sequestering the substrate phosphatidylinositol 4,5-bisphosphate (PIP(2)), since increasing concentrations of PIP(2) reversed the inhibitory effects of villin on PLC activity. The inhibition of PLC-gamma(1) activity by villin was reversed by the tyrosine phosphorylation of villin. Further, we demonstrated that tyrosine phosphorylation of villin abolished villin's ability to associate with PIP(2). In conclusion, tyrosine-phosphorylated villin associates with the COOH-terminal SH2 domain of PLC-gamma(1) and activates PLC-gamma(1) catalytic activity. Villin regulates PLC-gamma(1) activity by modifying its own ability to bind PIP(2). This study provides biochemical proof of the functional relevance of tyrosine phosphorylation of villin and identifies the molecular mechanisms involved in the activation of PLC-gamma(1) by villin.