Adipose triglyceride lipase (ATGL) catalyzes the first step in the hydrolysis of triacylglycerol (TG) generating diacylglycerol and free fatty acids. The enzyme requires the activator protein CGI-58 (or ABHD5) for full enzymatic activity. Defective ATGL function causes a recessively inherited disorder named neutral lipid storage disease that is characterized by systemic TG accumulation and myopathy. In this study, we investigated the functional defects associated with mutations in the ATGL gene that cause neutral lipid storage disease. We show that these mutations lead to the expression of either inactive enzymes localizing to lipid droplets (LDs) or enzymatically active lipases with defective LD binding. Additionally, our studies assign important regulatory functions to the C-terminal part of ATGL. Truncated mutant ATGL variants lacking approximately 220 amino acids of the C-terminal protein region do not localize to LDs. Interestingly, however, these mutants exhibit substantially increased TG hydrolase activity in vitro (up to 20-fold) compared with the wild-type enzyme, indicating that the C-terminal region suppresses enzyme activity. Protein-protein interaction studies revealed an increased binding of truncated ATGL to CGI-58, suggesting that the C-terminal part interferes with CGI-58 interaction and enzyme activation. Compared with the human enzyme, the C-terminal region of mouse ATGL is much less effective in suppressing enzyme activity, implicating species-dependent differences in enzyme regulation. Together, our results demonstrate that the C-terminal region of ATGL is essential for proper localization of the enzyme and suppresses enzyme activity.