A unique transacylase that catalyzes esterification of a short chain ceramide, N-acetylsphingosine, was found in Madin-Darby canine kidney cell and mouse tissue homogenates. It esterified the hydroxyl group at the carbon-1 position of the ceramide. The enzyme has a pH optimum of 4.2 and a Km of 9.4 microM for N-acetylsphingosine at pH 4.5. The transacylase activity is independent of free fatty acid or acyl-CoA and instead uses the 2-acyl group of phosphatidylethanolamine or phosphatidylcholine. The transacylase activity in the homogenate was present in the 100,000 x g supernatant, and the lipid extracted from the membranous fraction could function as a donor of the acyl group. When liposomes consisting of dioleoylphosphatidylcholine:1-palmitoyl-2-[14C]arachidonoyl-phosphati dylethanolamine:sulfatide (70:0.2:30) were incubated with the supernatant and N-acetylsphingosine, the formation of free arachidonic acid and O-arachidonoyl-N-acetylsphingosine was observed. The ratio of the two products depended on the concentration of ceramide; only the free acid was formed if the truncated ceramide was absent. Both deacylase and transacylase activities were inhibited 50-60% by 20 microM D-threo-1-phenyl-2-decanoylamino-3-morpholino-1-propanol, an inhibitor of several glucosphingolipid synthases. Neither activity was inhibited by nonadecyltetraenyl trifluoromethyl ketone, a potent inhibitor of cytosolic phospholipase A2. N-Acetyldihydrosphingosine and N-octanoylsphingosine were only 55 and 10%, respectively, as effective as N-acetylsphingosine as acyl acceptors. Oleoylsphingosine was only slightly reactive. An esterase that releases the truncated ceramide from its ester linkage appears to be membrane bound. Lecithin was less effective than phosphatidylethanolamine as an acyl donor in the transacylation. Madin-Darby canine kidney cell cultures treated with N-acetyl-[3-3H]sphingosine formed radioactive polar sphingolipids, long chain ceramide, free sphingosine, and O-acyl-N-acetylsphingosine. This suggests that the deacylation and transacylation reactions observed in vitro occur in growing cells as well.