Several isozymes of mammalian type 2, Mg(2+)-independent phosphatidic acid phosphatase (PAP-2) have recently been cloned, and they are predicted to have their catalytic sites exposed at the cell surface membranes. We investigated the mode of utilization of extracellular lipid substrates by the human PAP-2b expressed in HEK293 cells as a green fluorescent fusion protein. We first confirmed the plasma membrane localization of the expressed PAP-2b. PAP-2b actively hydrolyzed exogenously added lysophosphatidic acid and short-chain phosphatidic acid. In the case of dephosphorylation of lysophosphatidic acid, the reaction products, including inorganic phosphate and monoacylglycerol, were recovered exclusively in the extracellular medium. Interestingly, PAP-2b exhibited negligible activities toward long-chain phosphatidic acid either exogenously when added or generated within the membranes by treating the cells with bacterial phospholipase D. These findings indicate that PAP-2b acts at the outer leaflet of cell surface bilayers and can account for the ecto-PAP activities previously described for various types of cells.