Sphingosine-1-phosphate (S1P) is a bioactive sphingolipid metabolite that regulates diverse biological processes by binding to a family of G protein-coupled receptors or as an intracellular second messenger. Mammalian S1P phosphatase (SPP-1), which degrades S1P to terminate its actions, was recently cloned based on homology to a lipid phosphohydrolase that regulates the levels of phosphorylated sphingoid bases in yeast. Confocal microscopy surprisingly revealed that epitope-tagged SPP-1 is intracellular and colocalized with the ER marker calnexin. Moreover, SPP-1 activity and protein appeared to be mainly enriched in the intracellular membranes with lower expression in the plasma membrane. Treatment of SPP-1 transfectants with S1P markedly increased ceramide levels, predominantly in the intracellular membranes, diminished survival, and enhanced apoptosis. Remarkably, dihydro-S1P, although a good substrate for SPP-1 in situ, did not cause significant ceramide accumulation or increase apoptosis. Ceramide accumulation induced by S1P was completely blocked by fumonisin B1, an inhibitor of ceramide synthase, but only partially reduced by myriocin, an inhibitor of serine palmitoyltransferase, the first committed step in de novo synthesis of ceramide. Furthermore, S1P, but not dihydro-S1P, stimulated incorporation of [3H]palmitate, a substrate for both serine palmitoyltransferase and ceramide synthase, into C16-ceramide. Collectively, our results suggest that SPP-1 functions in an unprecedented manner to regulate sphingolipid biosynthesis and is poised to influence cell fate.