Transcription is regulated by the state of phosphorylation of a heptapeptid
e repeat known as the carboxy-terminal domain (CTD) present in the largest
subunit of RNA polymerase II (RNAPII). RNAPII that associates with transcri
ption initiation complexes contains an unphosphorylated CTD, whereas the el
ongating polymerase has a phosphorylated CTD. Transcription factor III-I ha
s a kinase activity specific for the CTD that is stimulated by the formatio
n of a transcription initiation complex. Here, we report the isolation of a
cDNA clone encoding a 150-kD polypeptide, which, together with RNAPII, rec
onstitutes a highly specific CTD phosphatase activity. Functional analysis
demonstrates that the CTD phosphatase allows recycling of RNAPII. The phosp
hatase dephosphorylates the CTD allowing efficient incorporation of RNAPII
into transcription initiation complexes, which results in increased transcr
iption. The CTD phosphatase was found to be active in ternary elongation co
mplexes. Moreover, the phosphatase stimulates elongation by RNAPII; however
, this function is independent of its catalytic activity.