The lipid A anchor of Francisella tularensis lipopolysaccharide (LPS) lacks both phosphate groups present in Escherichia coli lipid A. Membranes of Francisella novicida (an environmental strain related to F. tularensis) contain enzymes that dephosphorylate lipid A and its precursors at the 1- and 4'-positions. We now report the cloning and characterization of a membrane-bound phosphatase of F. novicida that selectively dephosphorylates the 1-position. By transferring an F. novicida genomic DNA library into E. coli and selecting for low level polymyxin resistance, we isolated FnlpxE as the structural gene for the 1-phosphatase, an inner membrane enzyme of 239 amino acid residues. Expression of FnlpxE in a heptose-deficient mutant of E. coli caused massive accumulation of a previously uncharacterized LPS molecule, identified by mass spectrometry as 1-dephospho-Kdo2-lipid A. The predicted periplasmic orientation of the FnLpxE active site suggested that LPS export might be required for 1-dephosphorylation of lipid A. LPS and phospholipid export depend on the activity of MsbA, an essential inner membrane ABC transporter. Expression of FnlpxE in the msbA temperature-sensitive E. coli mutant WD2 resulted in 90% 1-dephosphorylation of lipid A at the permissive temperature (30 degrees C). However, the 1-phosphate group of newly synthesized lipid A was not cleaved at the nonpermissive temperature (44 degrees C). Our findings provide the first direct evidence that lipid A 1-dephosphorylation catalyzed by LpxE occurs on the periplasmic surface of the inner membrane.