We have identified two proteins that bind with high specificity to type 1 serine/threonine protein phosphatase (PP1) and have exploited their inhibitory properties to develop an efficient and flexible strategy for conditional inactivation of PP1 in vivo. We show that modest overexpression of Drosophila homologs of I-2 and NIPP1 (I-2Dm and NIPP1Dm) reduces the level of PP1 activity and phenotypically resembles known PP1 mutants. These phenotypes, which include lethality, abnormal mitotic figures, and defects in muscle development, are suppressed by coexpression of PP1, indicating that the effect is due specifically to loss of PP1 activity. Reactivation of I- 2Dm:PP1c complexes suggests that inhibition of PP1 activity in vivo does not result in a compensating increase in synthesis of active PP1. PP1 mutants enhance the wing overgrowth phenotype caused by ectopic expression of the type II TGF beta superfamily signaling receptor Punt. Using I-2Dm, which has a less severe effect than NIPP1Dm, we show that lowering the level of PP1 activity specifically in cells overexpressing Punt is sufficient for wing overgrowth and that the interaction between PP1 and Punt requires the type I receptor Thick-veins (Tkv) but is not strongly sensitive to the level of the ligand, Decapentaplegic (Dpp), nor to that of the other type I receptors. This is consistent with a role for PP1 in antagonizing Punt by preventing phosphorylation of Tkv. These studies demonstrate that inhibitors of PP1 can be used in a tissue- and developmental-specific manner to examine the developmental roles of PP1.