Based on sequence homology to mammalian acid lipases, yeast reading frame YKL140w was predicted to encode a triacylglycerol (TAG) lipase in yeast and was hence named as TGL1, triglyceride lipase 1. A deletion of TGL1, however, resulted in an increase of the cellular steryl ester content. Fluorescently labeled lipid analogs that become covalently linked to the enzyme active site upon catalysis were used to discriminate between the lipase and esterase activities of Tgl1p. Tgl1p preferred single-chain esterase inhibitors over lipase inhibitors in vitro. Under assay conditions optimal for acid lipases, Tgl1p exhibited steryl esterase activity only and lacked any triglyceride lipase activity. In contrast, at pH 7.4, Tgl1p also exhibited TAG lipase activity; however, steryl ester hydrolase activity was still predominant. Tgl1p localized exclusively to lipid droplets which are the intracellular storage compartment of steryl esters and triacylglycerols in the yeast S. cerevisiae. In a tgl1 deletion mutant, the mobilization of steryl esters in vivo was delayed, but not abolished, suggesting the existence of additional enzymes involved in steryl ester mobilization.