It is well known that prostaglandin E2 (PGE2) both inhibits arginine vasopressin (AVP)-stimulated water permeability (hydraulic conductivity, Lp) in the cortical collecting duct (CCD) or, if administered alone, modestly increases Lp in the CCD. These bifunctional effects on Lp correspond to PGE2's capacity to inhibit AVP-stimulated adenylate cyclase (AC) activity, or to singularly stimulate AC activity in the collecting duct. The present studies suggest that the inhibitory effect of PGE2 on Lp may also be mediated by phosphatidylinositol (PI) hydrolysis. Using in vitro microperfused rabbit CCDs, we show that PGE2 releases Ca from intracellular stores. We also demonstrate that the inhibitory effect of PGE2 on AVP-stimulated Lp in the CCD is significantly reversed by the protein kinase C (PKC) inhibitor, staurosporine (SSP). Although PGE2 does not reduce an established water flow response to 8-(4-chlorophenylthio)-adenosine 3',5'-cyclic monophosphate (8-CPTcAMP), when the sequence of addition is reversed and PGE2 is added first, marked inhibition of 8-CPTcAMP-induced Lp is observed. This provides independent evidence that PGE2 can act through a mechanism separate from modulating AC activity. PGE2 inhibition of 8-CPTcAMP-induced Lp is reversed by SSP pretreatment. Finally, SSP pretreatment also markedly potentiates the capacity of PGE2 itself to increase Lp. We conclude that PGE2 releases Ca from intracellular stores and, by activating PKC, inhibits AVP-induced osmotic water flow. This suggests an important role for PI hydrolysis in mediating PGE2's effects on the CCD.