The small GTPase Rab2 requires atypical protein kinase C iota/lambda (PKCiota/lambda) kinase activity to promote vesicle budding from normal rat kidney cell microsomes (Tisdale, E. J. (2000) Traffic 1, 702-712). The released vesicles lack anterograde-directed cargo but contain coat protein I (COPI) and the recycling protein p53/p58, suggesting that the vesicles traffic in the retrograde pathway. In this study, we have directly characterized the role of PKCiota/lambda in the early secretory pathway. A peptide corresponding to the unique PKCiota/lambda pseudosubstrate domain was introduced into an in vitro assay that efficiently reconstitutes transport of vesicular stomatitis virus glycoprotein from the endoplasmic reticulum to the cis-medial Golgi compartments. This peptide blocked transport in a dose-dependent manner. Moreover, normal rat kidney cells incubated with Rab2 and the pseudosubstrate peptide displayed abundant swollen or dilated vesicles that contained Rab2, PKCiota/lambda, beta-COP, and p53/p58. Because Rab2, beta-COP, and p53/p58 are marker proteins for pre-Golgi intermediates (vesicular tubular clusters,VTCs), most probably the swollen vesicles are derived from VTCs. Similar results were obtained when the assays were supplemented with kinase-dead PKCiota/lambda (W274K). Both the pseudosubstrate peptide and kinase-dead PKCiota/lambda in tandem with Rab2 caused sustained membrane association of PKCiota/lambda, suggesting that reverse translocation was inhibited. Importantly, the inhibitory phenotype of kinase-dead PKCiota/lambda was reversed by PKCiota/lambda wild type. These combined results indicate that PKCiota/lambda is essential for protein transport in the early secretory pathway and suggest that PKCiota/lambda kinase activity is required to promote Rab2-mediated vesicle budding at a VTC subcompartment enriched in recycling cargo.