Multiple ion channels have now been shown to be regulated by phosphatidylinositol 4,5-bisphosphate (PIP2) at the cytoplasmic face of the membrane. However, direct evidence for a specific interaction between phosphoinositides and ion channels is critically lacking. We reconstituted pure KirBac1.1 and KcsA protein into liposomes of defined composition (3:1 phosphatidylethanolamine:phosphatidylglycerol) and examined channel activity using a 86Rb+ uptake assay. We demonstrate direct modulation by PIP2 of KirBac1.1 but not KcsA activity. In marked contrast to activation of eukaryotic Kir channels by PIP2, KirBac1.1 is inhibited by PIP2 incorporated in the membrane (K1/2 = 0.3 mol %). The dependence of inhibition on the number of phosphate groups and requirement for a lipid tail matches that for activation of eukaryotic Kir channels, suggesting a fundamentally similar interaction mechanism. The data exclude the possibility of indirect modulation via cytoskeletal or other intermediary elements and establish a direct interaction of the channel with PIP2 in the membrane.