Activation of protein kinase clients by the Hsp90 system is mediated by the cochaperone protein Cdc37. Cdc37 requires phosphorylation at Ser13, but little is known about the regulation of this essential posttranslational modification. We show that Ser13 of uncomplexed Cdc37 is phosphorylated in vivo, as well as in binary complex with a kinase (C-K), or in ternary complex with Hsp90 and kinase (H-C-K). Whereas pSer13-Cdc37 in the H-C-K complex is resistant to nonspecific phosphatases, it is efficiently dephosphorylated by the chaperone-targeted protein phosphatase 5 (PP5/Ppt1), which does not affect isolated Cdc37. We show that Cdc37 and PP5/Ppt1 associate in Hsp90 complexes in yeast and in human tumor cells, and that PP5/Ppt1 regulates phosphorylation of Ser13-Cdc37 in vivo, directly affecting activation of protein kinase clients by Hsp90-Cdc37. These data reveal a cyclic regulatory mechanism for Cdc37, in which its constitutive phosphorylation is reversed by targeted dephosphorylation in Hsp90 complexes.