Phosphoinositides function as important second messengers in a wide range of cellular processes. Inositol polyphosphate 1-phosphatase (IPP) is an enzyme essential for the hydrolysis of the 1-phosphate from either Ins(1,4)P2 or Ins(1,3,4)P3. This enzyme is Li+ sensitive, and is one of the proposed targets of Li+ therapy in manic-depressive illness. Drosophila ipp mutants accumulate IP2 in their system and are incapable of metabolizing exogenous Ins(1,4)P2. Notably, ipp mutants demonstrate compensatory upregulation of an alternative branch in the inositol-phosphate metabolism tree, thus providing a means of ensuring continued availability of inositol. We demonstrate that ipp mutants have a defect in synaptic transmission resulting from a dramatic increase in the probability of vesicle release at larval neuromuscular junctions. We also show that Li+ phenocopies this effect in wild-type synapses. Together, these results support a role for phosphoinositides in synaptic vesicle function in vivo and mechanistically question the "lithium hypothesis."