In the budding yeast Saccharomyces cerevisiae, phosphatidylinositol 3,5-bisphosphate (PtdIns(3,5)P2) is synthesized by a single phosphatidylinositol 3-phosphate 5-kinase, Fab1. Cells deficient in PtdIns(3,5)P2 synthesis exhibit a grossly enlarged vacuole morphology, whereas increased levels of PtdIns(3,5)P2 provokes the formation of multiple small vacuoles, suggesting a specific role for PtdIns(3,5)P2 in vacuole size control. Genetic studies have indicated that Fab1 kinase is positively regulated by Vac7 and Vac14; deletion of either gene results in ablation of PtdIns(3,5)P2 synthesis and the formation of a grossly enlarged vacuole. More recently, a suppressor of vac7Delta mutants was identified and shown to encode a putative phosphoinositide phosphatase, Fig4. We demonstrate that Fig4 is a magnesium-activated PtdIns(3,5)P2-selective phosphoinositide phosphatase in vitro. Analysis of a Fig4-GFP fusion protein revealed that the Fig4 phosphatase is localized to the limiting membrane of the vacuole. Surprisingly, in the absence of Vac14, Fig4-GFP no longer localizes to the vacuole. However, Fig4-GFP remains localized to the grossly enlarged vacuoles of vac7 deletion mutants. Consistent with these observations, we found that Fig4 physically associates with Vac14 in a common membrane-associated complex. Our studies indicate that Vac14 both positively regulates Fab1 kinase activity and directs the localization/activation of the Fig4 PtdIns(3,5)P2 phosphatase.