Both phosphoinositides and small GTP-binding proteins of the Rho family have been postulated to regulate actin assembly in cells. We have reconstituted actin assembly in response to these signals in Xenopus extracts and examined the relationship of these pathways. We have found that GTPγS stimulates actin assembly in the presence of endogenous membrane vesicles in low speed extracts. These membrane vesicles are required, but can be replaced by lipid vesicles prepared from purified phospholipids containing phosphoinositides. Vesicles containing phosphatidylinositol (4,5) bisphosphate or phosphatidylinositol (3,4,5) trisphosphate can induce actin assembly even in the absence of GTPγS. RhoGDI, a guanine-nucleotide dissociation inhibitor for the Rho family, inhibits phosphoinositide-induced actin assembly, suggesting the involvement of the Rho family small G proteins. Using various dominant mutants of these G proteins, we demonstrate the requirement of Cdc42 for phosphoinositide-induced actin assembly. Our results suggest that phosphoinositides may act to facilitate GTP exchange on Cdc42, as well as to anchor Cdc42 and actin nucleation activities. Hence, both phosphoinositides and Cdc42 are required to induce actin assembly in this cell-free system.