Atypical protein kinase C (aPKC) isoforms are activated by the phosphatidylinositol 3-kinase product, phosphatidylinositol-3,4,5-(PO4)3 (PIP3). How PIP3 activates aPKC is unknown. Whereas Akt activation involves PIP3 binding to basic residues in the Akt pleckstrin homology domain, aPKCs lack this domain. Here, we examined the role of basic arginine residues common to aPKC pseudosubstrate sequences. Replacement of all five (or certain) arginine residues in the pseudosubstrate sequence of PKC-iota by site-directed mutagenesis led to constitutive activation and unresponsiveness to PIP3 invitro or insulin invivo. However, with addition of exogenous arginine-containing pseudosubstrate tridecapeptide to inhibit this constitutively-active PKC-iota, PIP3 activating effects were restored. Similar restoration of responsiveness to PIP3 was seen when exogenous pseudosubstrate was used to inhibit: mouse liver PKC-lambda-zeta maximally activated by insulin or ceramide; and truncated, constitutively-active PKC-zeta mutant lacking all regulatory domain elements and containing activating glutamate residues at loop and auto-phosphorylation sites, 1-247-T410E-T560E-PKC-zeta. NMR studies suggested that PIP3 binds directly to the pseudosubstrate. The ability of PIP3 to counteract inhibitory effects of exogenous pseudosubstrate suggested that basic residues in the pseudosubstrate sequence are required for maintaining aPKCs in an inactive state, and are targeted by PIP3 for displacement from the substrate-binding site during kinase activation.