Phosphatidylinositol 3,5-bisphosphate (PtdIns[3,5]P(2)) was first identified as a non-abundant phospholipid whose levels increase in response to osmotic stress. In yeast, Fab1p catalyzes formation of PtdIns(3,5)P(2) via phosphorylation of PtdIns(3)P. We have identified Vac14p, a novel vacuolar protein that regulates PtdIns(3,5)P(2) synthesis by modulating Fab1p activity in both the absence and presence of osmotic stress. We find that PtdIns(3)P levels are also elevated in response to osmotic stress, yet, only the elevation of PtdIns(3,5)P(2) levels are regulated by Vac14p. Under basal conditions the levels of PtdIns(3,5)P(2) are 18-28-fold lower than the levels of PtdIns(3)P, PtdIns(4)P, and PtdIns(4,5)P(2). After a 10 min exposure to hyperosmotic stress the levels of PtdIns(3,5)P(2) rise 20-fold, bringing it to a cellular concentration that is similar to the other phosphoinositides. This suggests that PtdIns(3,5)P(2) plays a major role in osmotic stress, perhaps via regulation of vacuolar volume. In fact, during hyperosmotic stress the vacuole morphology of wild-type cells changes dramatically, to smaller, more highly fragmented vacuoles, whereas mutants unable to synthesize PtdIns(3,5)P(2) continue to maintain a single large vacuole. These findings demonstrate that Vac14p regulates the levels of PtdIns(3,5)P(2) and provide insight into why PtdIns(3,5)P(2) levels rise in response to osmotic stress.