Rat sciatic nerve cytosol contains a phosphodiesterase of the phospholipase C type that catalyzes the hydrolysis of inositol phospholipids, with preferences of phosphatidylinositol 4'-phosphate (PIP) greater than phosphatidylinositol (PI) much greater than phosphatidylinositol 4',5'-bisphosphate (PIP2), at a pH optimum of 5.5-6.0 and at maximum rates of 55, 13, and 0.7 nmol/min/mg protein, respectively. Analysis of reaction products by TLC and formate exchange chromatography shows that inositol 1,2-cyclic phosphate (83%) and diacylglycerol are the major products of PI hydrolysis. [32P]-PIP hydrolysis yields inositol bisphosphate, inositol phosphate, and inorganic phosphate, indicating the presence of phosphodiesterase, phosphomonoesterase, and/or inositol phosphate phosphatase activities in nerve cytosol. Phosphodiesterase activity is Ca2+-dependent and completely inhibited by EGTA, but phosphomonoesterase activity is independent of divalent cations or chelating agents. Phosphatidylcholine (PC) and lysophosphatidylcholine (lysoPC) inhibit PI hydrolysis. They stimulate PIP and PIP2 hydrolysis up to equimolar concentrations, but are inhibitory at higher concentrations. Both diacylglycerols and free fatty acids stimulate PI hydrolysis and counteract its inhibition by PC and lysoPC. PIP2 is a poor substrate for the cytosolic phospholipase C and strongly inhibits hydrolysis of PI. However, it enhances PIP hydrolysis up to an equimolar concentration.