Human lysosomal arylsulfatase A (ASA) is a prototype member of the sulfatase family. These enzymes require the posttranslational oxidation of the -CH2SH group of a conserved cysteine to an aldehyde, yielding a formylglycine. Without this modification sulfatases are catalytically inactive, as revealed by a lysosomal storage disorder known as multiple sulfatase deficiency. The 2.1 A resolution X-ray crystal structure shows an ASA homooctamer composed of a tetramer of dimers, (alpha 2)4. The alpha/beta fold of the monomer has significant structural analogy to another hydrolytic enzyme, the alkaline phosphatase, and superposition of these two structures shows that the active centers are located in largely identical positions. The functionally essential formylglycine is located in a positively charged pocket and acts as ligand to an octahedrally coordinated metal ion interpreted as Mg2+. The electron density at the formylglycine suggests the presence of a 2-fold disordered aldehyde group with the possible contribution of an aldehyde hydrate, -CH(OH)2, with gem-hydroxyl groups. In the proposed catalytic mechanism, the aldehyde accepts a water molecule to form a hydrate. One of the two hydroxyl groups hydrolyzes the substrate sulfate ester via a transesterification step, resulting in a covalent intermediate. The second hydroxyl serves to eliminate sulfate under inversion of configuration through C-O cleavage and reformation of the aldehyde. This study provides the structural basis for understanding a novel mechanism of ester hydrolysis and explains the functional importance of the unusually modified amino acid.