Lipid droplets, the intracellular storage organelles for neutral lipids, exist in a wide range of sizes and of morphologically distinct organization, from loosely dispersed lipid droplets to tightly packed lipid droplet clusters. We show that the lipid droplet protein AUP1 induces cluster formation. A fraction of AUP1 is monoubiquitinated at various lysine residues. This process depends on its internal CUE domain, which is a known ubiquitin-binding domain. AUP1 with a deleted or point mutagenized CUE domain, as well as a lysine-free mutant, are not ubiquitinated and do not induce lipid droplet clustering. When such ubiquitination deficient mutants are fused to ubiquitin, clustering is restored. AUP1 mutants with defective droplet targeting fail to induce clustering. Also, another lipid droplet protein, NSDHL, with a fused ubiquitin does not induce clustering. The data indicate that monoubiquitinated AUP1 on the lipid droplet surface specifically induces clustering, and suggest a homophilic interaction with a second AUP1 molecule or a heterophilic interaction with another ubiquitin-binding protein.