Escherichia coli apolipoprotein N-acyltransferase (Lnt) transfers an acyl group from sn-1-glycerophos-pholipid to the free R-amino group of the N-terminal cysteine of apolipoproteins, resulting in mature triacylated lipoprotein. Here we report that the Lnt reaction proceeds through an acyl-enzyme intermediate in which a palmitoyl group forms a thioester bond with the thiol of the active site residue C387 that was cleaved by neutral hydroxylamine. Lnt(C387S) also formed a fatty acyl intermediate that was resistant to neutral hydroxylamine treatment, consistent with formation of an oxygen-ester linkage. Lnt(C387A) did not form an acyl-enzyme intermediate and, like Lnt(C387S), did not have any detectable Lnt activity, indicating that acylation cannot occur at other positions in the catalytic domain. The existence of this thioacyl-enzyme intermediate allowed us to determine whether essential residues in the catalytic domain of Lnt affect the first step of the reaction, the formation of the acyl-enzyme intermediate, or the second step in which the acyl chain is transferred to the apolipoprotein substrate. In the catalytic triad, E267 is required for the formation of the acyl-enzyme intermediate, indicating its role in enhancing the nucleophilicity of C387. E343 is also involved in the first step but is not in close proximity to the active site. W237, Y388, and E389 play a role in the second step of the reaction since acyl-Lnt is formed but N-acylation does not occur. The data presented allow discrimination between the functions of essential Lnt residues in catalytic activity and substrate recognition.