Palmitoylation of the vacuolar membrane protein Vac8p is essential for vacuole fusion in yeast (Veit, M., R. Laage, L. Dietrich, L. Wang, and C. Ungermann. 2001. EMBO J. 20:3145-3155; Wang, Y.X., E.J. Kauffman, J.E. Duex, and L.S. Weisman. 2001. J. Biol. Chem. 276:35133-35140). Proteins that contain an Asp-His-His-Cys (DHHC)-cysteine rich domain (CRD) are emerging as a family of protein acyltransferases, and are therefore candidates for mediators of Vac8p palmitoylation. Here we demonstrate that the DHHC-CRD proteins Pfa3p (protein fatty acyltransferase 3, encoded by YNL326c) and Swf1p are important for vacuole fusion. Cells lacking Pfa3p had fragmented vacuoles when stressed, and cells lacking both Pfa3p and Swf1p had fragmented vacuoles under normal growth conditions. Pfa3p promoted Vac8p membrane association and palmitoylation in vivo and partially purified Pfa3p palmitoylated Vac8p in vitro, establishing Vac8p as a substrate for palmitoylation by Pfa3p. Vac8p is the first N-myristoylated, palmitoylated protein identified as a substrate for a DHHC-CRD protein.