Regulated covalent modifications of lipid A are implicated in virulence of pathogenic Gram-negative bacteria. The Salmonella typhimurium PhoP/PhoQ-activated gene pagP is required both for biosynthesis of hepta-acylated lipid A species containing palmitate and for resistance to cationic anti-microbial peptides. Palmitoylated lipid A can also function as an endotoxin antagonist. We now show that pagP and its Escherichia coli homolog (crcA) encode an unusual enzyme of lipid A biosynthesis localized in the outer membrane. PagP transfers a palmitate residue from the sn-1 position of a phospholipid to the N-linked hydroxymyristate on the proximal unit of lipid A (or its precursors). PagP bearing a C-terminal His(6)-tag accumulated in outer membranes during overproduction, was purified with full activity and was shown by cross-linking to behave as a homodimer. PagP is the first example of an outer membrane enzyme involved in lipid A biosynthesis. Additional pagP homologs are encoded in the genomes of Yersinia and Bordetella species. PagP may provide an adaptive response toward both Mg(2+) limitation and host innate immune defenses.