gamma-Secretase is an aspartic protease that hydrolyzes type I membrane proteins within the hydrophobic environment of the lipid bilayer. Using the CHAPSO-solubilized gamma-secretase assay system, we previously found that gamma-secretase activity was sensitive to the concentrations of detergent and phosphatidylcholine. This strongly suggests that the composition of the lipid bilayer has a significant impact on the activity of gamma-secretase. Recently, level of secreted beta-amyloid protein was reported to be attenuated by increasing levels of phosphatidylinositol 4,5-diphosphate (PI(4,5)P(2)) in cultured cells. However, it is not clear whether PI(4,5)P(2) has a direct effect on gamma-secretase activity. In this study, we found that phosphoinositides directly inhibited CHAPSO-solubilized gamma-secretase activity. Interestingly, neither phosphatidylinositol nor inositol triphosphate altered gamma-secretase activity. PI(4,5)P(2) was also found to inhibit gamma-secretase activity in CHAPSO-insoluble membrane microdomains (rafts). Kinetic analysis of beta-amyloid protein production in the presence of PI(4,5)P(2) suggested a competitive inhibition. Even though phosphoinositides are minor phospholipids of the membrane, the concentration of PI(4,5)P(2) within the intact membrane has been reported to be in the range of 4-8 mM. The presence of PI(4,5)P(2)-rich rafts in the membrane has been reported in a range of cell types. Furthermore, gamma-secretase is enriched in rafts. Taking these data together, we propose that phosphoinositides potentially regulate gamma-secretase activity by suppressing its association with the substrate.