cAMP-dependent processes are essential for cell growth, differentiation, and homeostasis. The classic components of this system include the serpentine receptors, heterotrimeric G-proteins, adenylyl cyclase, protein kinase A (PKA), and numerous downstream target substrates. Evidence is accumulating that some members of this cascade are concentrated within membrane microdomains, termed caveolae and caveolae-related domains. In addition, the caveolin-1 protein has been shown to interact with some of these components, and this interaction inhibits their enzymatic activity. However, the functional effects of caveolins on cAMP-mediated signaling at the most pivotal step, PKA activation, remain unknown. Here, we show that caveolin-1 can dramatically inhibit cAMP-dependent signaling in vivo. We provide evidence for a direct interaction between caveolin-1 and the catalytic subunit of PKA both in vitro and in vivo. Caveolin-1 binding appears to be mediated both by the caveolin scaffolding domain (residues 82-101) and a portion of the C-terminal domain (residues 135-156). Further functional analysis indicates that caveolin-based peptides derived from these binding regions can inhibit the catalytic activity of purified PKA in vitro. Mutational analysis of the caveolin scaffolding domain reveals that a series of aromatic residues within the caveolin scaffolding domain are critical for mediating inhibition of PKA. In addition, co-expression of caveolin-1 and PKA in cultured cells results in their co-localization as seen by immunofluorescence microscopy. In cells co-expressing caveolin-1 and PKA, PKA assumed a punctate distribution that coincided with the distribution of caveolin-1. In contrast, in cells expressing PKA alone, PKA was localized throughout the cytoplasm and yielded a diffuse staining pattern. Taken together, our results suggest that the direct inhibition of PKA by caveolin-1 is an important and previously unrecognized mechanism for modulating cAMP- mediated signaling.