A neuronal membrane protein, neuropathy target esterase (NTE), reacts with those organophosphates that initiate a syndrome of axonal degeneration. NTE has homologues in Drosophila and yeast and is detected in vitro by assays with a non-physiological ester substrate, phenyl valerate. We report that NEST, the recombinant esterase domain of NTE (residues 727-1216) purified from bacterial lysates, can catalyze hydrolysis of several naturally occurring membrane-associated lipids. The active site regions of NEST and calcium-independent phospholipase A(2) (iPLA(2)) share sequence similarity, and the phenyl valerate hydrolase activity of NEST is inhibited by low concentrations of iPLA(2) inhibitors. However, on incubation with NEST, fatty acid was liberated only extremely slowly from the sn-2 position of phospholipids (V(max) approximately 0.01 micromol/min/mg and K(m) approximately 0.4 mm for 1-palmitoyl, 2-oleoylphosphatidylcholine). Comparison of the NEST-mediated generation of (14)C-labeled products from two differentially labeled (14)C-phospholipid substrates suggested that a rate-limiting sn-2 cleavage was followed very rapidly by hydrolysis of the resulting lysophospholipid. Among the various naturally occurring lipids tested with NEST, lysophospholipids were by far the most avidly hydrolyzed substrates (V(max) approximately 20 micromol/min/mg and K(m) approximately 0.05 mm for 1-palmitoyl-lysophosphatidylcholine). NEST also catalyzed the hydrolysis of monoacylglycerols, preferring the 1-acyl to the 2-acyl isomer (V(max) approximately 1 micromol/min/mg and K(m) approximately 0.4 mm for 1-palmitoylglycerol). NEST did not catalyze hydrolysis of di- or triacylglycerols or fatty acid amides. This demonstration that membrane lipids are its putative cellular substrates raises the possibility that NTE and its homologues may be involved in intracellular membrane trafficking.