Fatty acid reduction in Photobacterium phosphoreum is catalyzed in a coupled reaction by two enzymes: acyl-protein synthetase, which activates fatty acids (+ATP), and a reductase, which reduces activated fatty acids (+NADPH) to aldehyde. Although the synthetase and reductase can be acylated with fatty acid (+ATP) and acyl-CoA, respectively, evidence for acyl transfer between these proteins has not yet been obtained. Experimental conditions have now been developed to increase significantly (5-30-fold) the level of protein acylation so that 0.4-0.8 mol of fatty acyl groups are incorporated per mole of the synthetase or reductase subunit. The acylated reductase polypeptide migrated faster on sodium dodecyl sulfate-polyacrylamide gel electrophoresis than the unlabeled polypeptide, with a direct 1 to 1 correspondence between the moles of acyl group incorporated and the moles of polypeptide migrating at this new position. The presence of 2-mercaptoethanol or NADPH, but not NADP, substantially decreased labeling of the reductase enzyme, and kinetic studies demonstrated that the rate of covalent incorporation of the acyl group was 3-5 times slower than its subsequent reduction with NADPH to aldehyde. When mixtures of the synthetase and reductase polypeptides were incubated with [3H] tetradecanoic acid (+ATP) or [3H]tetradecanoyl-CoA, both polypeptides were acylated to high levels, with the labeling again being decreased by 2-mercaptoethanol or NADPH. These results have demonstrated that acylation of the reductase represents an intermediate and rate-limiting step in fatty acid reduction. Moreover, the activated acyl groups are transferred in a reversible reaction between the synthetase and reductase proteins in the enzyme mechanism.