Melanoregulin (MREG), the product of the Mreg(dsu) gene, is a small highly charged protein, hypothesized to play a role in organelle biogenesis due to its effect on pigmentation in dilute, ashen, and leaden mutant mice. Here we provide evidence that MREG is required in lysosome-dependent phagosome degradation. In the Mreg(-/-) mouse, we show that loss of MREG function results in phagosome accumulation due to delayed degradation of engulfed material. Over time, the Mreg(-/-) mouse retinal pigment epithelial cells accumulate the lipofuscin component, A2E. MREG-deficient human and mouse retinal pigment epithelial cells exhibit diminished activity of the lysosomal hydrolase, cathepsin D, due to defective processing. Moreover, MREG localizes to small intracellular vesicles and associates with the endosomal phosphoinositide, phosphatidylinositol 3,5-biphosphate. Collectively, these studies suggest that MREG is required for lysosome maturation and support a role for MREG in intracellular trafficking.