We have identified the yeast sphingosine resistance gene (YSR2) of Saccharomyces cerevisiae as encoding a protein that specifically dephosphorylates dihydrosphingosine 1-phosphate (DHS-1-P), and we refer to this protein as dihydrosphingosine-1-phosphate phosphatase. Overexpression of YSR2 conferred sphingosine resistance to the dihydrosphingosine-1-P lyase-defective mutant (JS16) of S. cerevisiae, which is hypersensitive to sphingosine. The ysr2Delta deletion mutant of S. cerevisiae accumulated DHS-1-P compared with its wild type strain upon labeling with D-erythro-[4, 5-3H]dihydrosphingosine, whereas overexpression of YSR2 increased dephosphorylation of DHS-1-P. An epitope-tagged fusion protein (YSR2-Flag) was partially purified and found to specifically dephosphorylate DHS-1-P to yield dihydrosphingosine. YSR2 failed to dephosphorylate ceramide 1-phosphate or phosphatidic acid. Functionally, the mutant bearing the ysr2Delta deletion decreased labeling of sphingolipids and increased labeling of glycerolipids dramatically following in vivo labeling with D-erythro-[3H]dihydrosphingosine, but it slightly affected labeling of sphingolipids with inositol. Taken together, these results identify YSR2 as dihydrosphingosine-1-phosphate phosphatase. They also raise the intriguing possibility that phosphorylation followed by dephosphorylation is required for incorporation of exogenous long chain sphingoid bases into sphingolipids.