Haploinsufficiency of progranulin (PGRN) due to mutations in the granulin (GRN) gene causes frontotemporal lobar degeneration (FTLD), and complete loss of PGRN leads to a lysosomal storage disorder, neuronal ceroid lipofuscinosis (NCL). Accumulating evidence suggests that PGRN is essential for proper lysosomal function, but the precise mechanisms involved are not known. Here, we show that PGRN facilitates neuronal uptake and lysosomal delivery of prosaposin (PSAP), the precursor of saposin peptides that are essential for lysosomal glycosphingolipid degradation. We found reduced levels of PSAP in neurons both in mice deficient in PGRN and in human samples from FTLD patients due to GRN mutations. Furthermore, mice with reduced PSAP expression demonstrated FTLD-like pathology and behavioural changes. Thus, our data demonstrate a role of PGRN in PSAP lysosomal trafficking and suggest that impaired lysosomal trafficking of PSAP is an underlying disease mechanism for NCL and FTLD due to GRN mutations.