Mammalian glycerol uptake/transporter 1 (Gup1), a homolog of Saccharomyces cerevisiae Gup1, is predicted to be a member of the membrane-bound O-acyltransferase family and is highly homologous to mammalian hedgehog acyltransferase, known as Skn, the homolog of the Drosophila skinny hedgehog gene product. Although mammalian Gup1 has a sequence conserved among the membrane-bound O-acyltransferase family, the histidine residue in the motif that is indispensable to the acyltransferase activity of the family has been replaced with leucine. In this study, we cloned Gup1 cDNA from adult mouse lung and examined whether Gup1 is involved in the regulation of N-terminal palmitoylation of Sonic hedgehog (Shh). Subcellular localization of mouse Gup1 was indistinguishable from that of mouse Skn detected using the fluorescence of enhanced green fluorescent protein that was fused to each C terminus of these proteins. Gup1 and Skn were co-localized with an endoplasmic reticulum marker, 78 kDa glucose-regulated protein, suggesting that these two molecules interact with overlapped targets, including Shh. In fact, full-length Shh coprecipitated with FLAG-tagged Gup1 by immunoprecipitation using anti-FLAG IgG. Ectopic expression of Gup1 with full-length Shh in cells lacking endogenous Skn showed no hedgehog acyltransferase activity as determined using the monoclonal antibody 5E1, which was found to recognize the palmitoylated N-terminal signaling domain of Shh under denaturing conditions. On the other hand, Gup1 interfered with the palmitoylation of Shh catalyzed by endogenous Skn in COS7 and NSC34. These results suggest that Gup1 is a negative regulator of N-terminal palmitoylation of Shh and may contribute to the variety of biological actions of Shh.