Presqualene diphosphate (PSDP) is a bioactive lipid that rapidly remodels to presqualene monophosphate (PSMP) upon cell activation (Levy, B. D., Petasis, N. A., and Serhan, C. N. (1997) Nature 389, 985-990). Here, we have identified and characterized a phosphatase that converts PSDP to PSMP. Unlike the related polyisoprenyl phosphate farnesyl diphosphate (FDP), PSDP was not a substrate for type 2 lipid phosphate phosphohydrolases. PSDP phosphatase activity was identified in activated human neutrophil (PMN) extracts and partially purified in the presence of Nonidet P-40 with gel filtration and anion exchange chromatography. Peptide sequencing of a candidate phosphatase was consistent with phosphatidic acid phosphatase domain containing 2 (PPAPDC2), an uncharacterized protein that contains a lipid phosphate phosphohydrolase consensus motif. Recombinant PPAPDC2 displayed diphosphate phosphatase activity with a substrate preference for PSDP > FDP > phosphatidic acid. PPAPDC2 activity was independent of Mg(2+) and optimal at pH 7.0 to 8.0. Incubation of [(14)C]FDP with recombinant human squalene synthase led to [(14)C]PSDP and [(14)C]squalene formation, and in the presence of PPAPDC2, [(14)C]PSMP was generated from [(14)C]PSDP. PPAPDC2 mRNA was detected in human PMN, and is widely expressed in human tissues. Together, these findings indicate that PPAPDC2 in human PMN is the first lipid phosphate phosphohydrolase identified for PSDP. Regulation of this activity of the enzyme may have important roles for PMN activation in innate immunity.