Several lines of evidence suggest that the N-terminal portion of the third cytoplasmic loop (i3) of muscarinic and other G protein-coupled receptors is of pivotal importance for G protein recognition and activation. The present study was designed to identify specific amino acids within this domain required for muscarinic receptor-induced activation of G proteins mediating stimulation of phosphatidylinositol (PI) hydrolysis. Among the five mammalian muscarinic receptors (m1-m5), only the m1, m3, and m5 receptors are efficiently coupled to this second messenger pathway. Initially, we created a series of rat m3 receptor mutants in which short segments in the N terminus of the i3 loop were replaced with the corresponding m2 receptor sequences. The effect of these substitutions on m3 receptor-mediated stimulation of PI hydrolysis was studied in transiently transfected COS-7 cells. We found that a stretch of 4 amino acids (Arg252-Ile253-Tyr254-Lys255) located at the beginning of the i3 domain of the m3 muscarinic receptor is critically involved in receptor-mediated stimulation of PI hydrolysis. Further mutational analysis of this 4-amino acid segment by single amino acid substitutions demonstrated that only Tyr254 is essential for efficient activation of the PI pathway. This tyrosine residue is conserved among all PI-coupled muscarinic receptors as well as in many other biogenic amine and glycoprotein hormone receptors, suggesting that it may also play an important functional role in other G protein-coupled receptors.