We have identified YSR2 and YSR3 of Saccharomyces cerevisiae as genes encoding dihydrosphingosine-1-phosphate phophatases which are involved in regulation of sphingolipid metabolism [Mao, Wadleigh, Jenkins, Hannun and Obeid (1997) J. Biol. Chem. 272, 28690-28694]. In this study, we explored the physiological roles that these enzymes may have in S. cerevisiae. Deletion of either YSR2, YSR3 or both did not affect viability or growth rate of yeast cells. However, overexpression of YSR2 significantly prolonged the doubling time of cell growth, whereas overexpression of YSR3 affected cell growth only slightly. Cell cycle analysis suggested that overexpression of either YSR2 or, to a lesser extent, YSR3 caused cell cycle arrest at the G1 phase. Disruption of YSR2, but not YSR3, conferred increased thermotolerance. On the other hand, overexpression of either YSR2 or YSR3 diminished thermotolerance. Using labelled dihydrosphingosine and dihydrosphingosine-1-P (DHS-1-P), we found that overexpression of YSR2 significantly increased ceramide formation, whereas deletion of YSR2, YSR3, or both, accumulated DHS-1-P, and deletion of YSR2 decreased ceramide formation. Together, these results show that the phenotypes of YSR2 are associated with changes in endogenous levels of the different sphingolipids. Green fluorescent protein tagging showed that in the exponentially growing cells, YSR2 and YSR3 had the same cellular localization to endoplasmic reticulum. However, YSR2 and YSR3 differ in mRNA levels: YSR2 had significantly higher mRNA levels than YSR3. This discrepancy might result in the functional differences that these proteins exhibited. In addition, this study implicates sphingolipids and their metabolism in the regulation of growth and heat stress responses of the yeast S. cerevisiae.