Liver supernatant from normal and alloxan-diabetic rats was fractionated by DEAE-cellulose chromatography and the separated phosphoprotein phosphatase fractions were assayed with [32P]histone fzb, [32P]phosphorylase a and [32P]phosphorylase kinase as substrates. In diabetic rat liver, one of the phosphatase fractions found in the normal liver was significantly reduced. This fraction was identified as a mixture of the spontaneously active form and the ATP . Mg-dependent form of phosphoprotein phosphatase-I (F,) based on sensitivity to inhibitor-2, substrate specificity, and the fact that it could be activated 42 -70% by glycogen synthase kinase-3 in the presence of ATP . Mg. Further analysis of this fraction showed that liver cytosol from diabetic rats contained 62-79% lower spontaneously active phosphatase-I activity and 40 -51 % lower combined spontaneously active and ATP . Mg-dependent protein phosphatase-1 (F,) activity. Insulin administration increased the spontaneously active and the ATP . Mg-dependent protein phosphatase-I activities approximately 45% and 36%, respectively, in alloxan-diabetic rats. These data imply that the lower levels of spontaneously active phosphatase-1 activity in diabetic rat liver cannot be explained by presuming phosphatase-1 to have been present as Fc, the inactive form. Moreover, insulin restored the total activity of the spontaneously active and activatable forms of phosphatase-I to those present in normal liver implying that both forms of phosphatase-I activity are under hormonal control.