Deletion of the yeast Ser/Thr protein phosphatase PPZ1 results in increased tolerance to sodium and lithium. PPZ1 is also important for cell integrity, as ppz1Delta cells undergo lysis under caffeine stress and PPZ1 overexpression overrides the lytic defect of mutants in the protein kinase C/mitogen-activated protein (MAP) kinase pathway. The PPZ1 protein can be dissected in two halves. The COOH-terminal half is related to type 1 phosphatases, whereas the NH2-terminal half is unrelated to phosphatases and contains a consensus site for N-myristoylation. Several mutated versions of PPZ1 have been constructed and tested for complementation of ppz1Delta mutants. We show that PPZ1 can be myristoylated in vivo and that change of Gly-2 to Ala results in lack of myristoylation and loss of complementation of salt tolerance. Removal of the entire NH2-terminal half results in complete loss of function, although it does not abolish the phosphatase activity of the protein expressed in Escherichia coli. The deletion of a large region of the NH2-terminal half (residues 17-193) does not affect the ability to complement the salt tolerance phenotype but abolish complementation of caffeine sensitivity, whereas the opposite behavior is observed upon removal of residues from 241 to 318. Mutation of Arg-451 to Leu results in both complete loss of function and of phosphatase activity. These results indicates that the NH2-terminal half of the protein contains structural determinants that are specific for certain functions and that the phosphatase activity is required but not sufficient for full PPZ1 function.