The hydrolysis of phosphatidylinositol-4,5-bisphosphate (PIP,) by rat sciatic nerve cytosolic phosphoinositidase C [phosphoinositide-specific phospholipase C (PIC)] was studied at neutral pH and at ionic concentrations that approximate intracellular conditions. The principal water-soluble product formed was shown to be inositol trisphosphate by anion exchange chromatography. The maximum hydrolysis rate (2.5 nmol/min/mg protein) was achieved at < 100 nM Ca2+. Hydrolysis was markedly increased to 15 nmol/min/mg protein by inclusion of K + in the reaction mixture. In the presence of 200 mM K + , the optimum Ca2+ was increased to approximately 600 nM. Higher Ca2+ concentrations progressively inhibited PIP, hydrolysis. Mg2+ also inhibited the reaction, but the presence of equimolar amounts of ATP and Mg2+ had no effect. Appreciable degradation of phosphatidylinositol-4-phosphate (PIP) also occurred in the nanomolar Ca2+ range, whereas breakdown of phosphatidylinositol (PI) required millimolar Ca2+. The presence of PIP but not PI inhibited PIP, hydrolysis. Upon subcellular fractionation of nerve, more than 50% of recovered PIC activity was in the cytosol and about 20% was located in a myelin-enriched fraction. Using PIP, as substrate, PIC activities in nerves from normal and streptozotocin-induced diabetic animals were not different. However, the myelin-associated enzyme from diabetic animals was more labile to freezing and thawing.