Neuropathy target esterase (NTE) is an integral membrane protein in vertebrate neurons and a member of a novel family of putative serine hydrolases. Here we show that NEST, a recombinant polypeptide expressed in Escherichia coli, reacts with an ester substrate and covalent inhibitors in a manner very similar to NTE. NEST comprises residues 727-1216 of human NTE, and site-directed mutagenesis revealed that serine 966 and two aspartate residues, Asp(1086) and Asp(960), are critical for catalysis. The results of mutating the 11 histidines in NEST suggest that NTE does not use a conventional catalytic triad. By reacting NEST with [(3)H]diisopropyl fluorophosphate, Ser(966) was confirmed as the active-site serine, and evidence was obtained that an isopropyl group is transferred from the Ser(966) adduct to an aspartate residue. Detergent was required both for solubilization of NEST from lysates of E. coli and during purification procedures. Catalytic activity was lost in detergent extracts, but was restored when purified NEST was incorporated into dioleoylphosphatidylcholine liposomes. Hydropathy analysis did not indicate the presence of membrane-spanning segments within the NEST sequence. However, biochemical evidence including detergent-phase separation experiments and the resistance of liposome-incorporated NEST to proteolysis indicated that, unlike most eukaryotic serine hydrolases, the catalytic domain of NTE has integral membrane protein properties.