The yeast protein Sac1p is involved in a range of cellular functions, including inositol metabolism, actin cytoskeletal organization, endoplasmic reticulum ATP transport, phosphatidylinositol-phosphatidylcholine transfer protein function, and multiple-drug sensitivity. The activity of Sac1p and its relationship to these phenotypes are unresolved. We show here that the regulation of lipid phosphoinositides in sac1 mutants is defective, resulting in altered levels of all lipid phos- phoinositides, particularly phosphatidylinositol 4-phosphate and phosphatidylinositol 4,5-bisphosphate. We have identified two proteins with homology to Sac1p that can suppress drug sensitivity and also restore the levels of the phosphoinositides in sac1 mutants. Overexpression of truncated forms of these suppressor genes confirmed that suppression was due to phosphoinositide phosphatase activity within these proteins. We have now demonstrated this activity for Sac1p and have characterized its specificity. The in vitro phosphatase activity and specificity of Sac1p were not altered by some mutations. Indeed, in vivo mutant Sac1p phosphatase activity also appeared unchanged under conditions in which cells were drug-resistant. However, under different growth conditions, both drug sensitivity and the phosphatase defect were manifest. It is concluded that SAC1 encodes a novel lipid phosphoinositide phosphatase in which specific mutations can cause the sac1 phenotypes by altering the in vivo regulation of the protein rather than by destroying phosphatase activity.