The NPY1 nudix hydrolase gene of Saccharomyces cerevisiae has been cloned and shown to encode a diphosphatase (pyrophosphatase) with NADH as the preferred substrate, giving NMNH and AMP as products. NADPH, diadenosine diphosphate, NAD+, NADP+, and ADP-ribose were also utilized efficiently. Km values for NADH, NAD+, and ADP-ribose were 0.17, 0.5, and 1.3 mM and kcat values 1.5, 0.6, and 0.6 s(-1), respectively. NPY1 has a potential C-terminal tripeptide PTS1 peroxisomal targeting signal (SHL). By fusing NPY1 to the C-terminus of yeast-enhanced green fluorescent protein, the enzyme was found to be targeted to peroxisomes. Colocalization with peroxisomal thiolase was also shown by indirect immunofluorescence. Related sequences in other organisms also have potential PTS1 signals, suggesting an important peroxisomal function for this protein. This function may be the regulation of nicotinamide coenzyme concentrations independently of those in other compartments or the elimination of oxidized nucleotide derivatives from the peroxisomal environment.