Phosphate is the essential macronutrient required for the growth of all organisms. In Saccharomyces cerevisiae, phosphatases are up-regulated, and the level of lysophosphatidic acid (LPA) is drastically decreased under phosphate-starved conditions. The reduction in the LPA level is attributed to PHM8, a gene of unknown function. phm8Delta yeast showed a decreased LPA-hydrolyzing activity under phosphate-limiting conditions. Overexpression of PHM8 in yeast resulted in an increase in the LPA phosphatase activity in vivo. In vitro assays of the purified recombinant Phm8p revealed magnesium-dependent LPA phosphatase activity, with maximal activity at pH 6.5. The purified Phm8p did not hydrolyze any lipid phosphates other than LPA. In silico analysis suggest that Phm8p is a soluble protein with no transmembrane domain. Site-directed mutational studies revealed that aspartate residues in a DXDXT motif are important for the catalysis. These findings indicated that LPA plays a direct role in phosphate starvation. This is the first report of the identification and characterization of magnesium-dependent soluble LPA phosphatase.