Although TAK1 signaling plays essential roles in eliciting cellular responses to interleukin-1 (IL-1), a proinflammatory cytokine, how the IL-1-TAK1 signaling pathway is positively and negatively regulated remains poorly understood. In this study, we investigated the possible role of a novel protein phosphatase 2C (PP2C) family member, PP2Cepsilon, in the regulation of the IL-1-TAK1 signaling pathway. PP2Cepsilon was composed of 303 amino acids, and the overall similarity of amino acid sequence between PP2Cepsilon and PP2Calpha was found to be 26%. Ectopic expression of PP2Cepsilon inhibited the IL-1- and TAK1-induced activation of mitogen-activated protein kinase kinase 4 (MKK4)-c-Jun N-terminal kinase or MKK3-p38 signaling pathway. PP2Cepsilon dephosphorylated TAK1 in vitro. Co-immunoprecipitation experiments indicated that PP2Cepsilon associates stably with TAK1 and attenuates the binding of TAK1 to MKK4 or MKK6. Ectopic expression of a phosphatase-negative mutant of PP2Cepsilon, PP2Cepsilon(D/A), which acted as a dominant negative form, enhanced both the association between TAK1 and MKK4 or MKK6 and the TAK1-induced activation of an AP-1 reporter gene. The association between PP2Cepsilon and TAK1 was transiently suppressed by IL-1 treatment of the cells. Taken together, these results suggest that, in the absence of IL-1-induced signal, PP2Cepsilon contributes to keeping the TAK1 signaling pathway in an inactive state by associating with and dephosphorylating TAK1.