Many signaling proteins are targeted to low density, sphingomyelin- and cholesterol-enriched membranes, also called lipid rafts. These domains organize receptor-mediated signaling events at the plasma membrane. Fatty acylation is one mechanism for targeting proteins to rafts. It was therefore of interest to determine if protein palmitoyltransferase activity is also present in these domains. In this study, protein palmitoyltransferase activity, assayed using G-protein alpha subunits as a substrate, was found to be highly enriched in low density membranes derived from cells that express caveolin as well as those that do not. Depletion of cellular cholesterol with the drug methyl-beta -cyclodextrin resulted in inhibition of palmitoyltransferase activity and a redistribution of the remaining activity to membranes of higher density. This effect was reversed by adding cholesterol to cyclodextrin-treated cells. When reconstituted into cell membranes, the population of purified recombinant G(alphai) that was palmitoylated was highly enriched in the low density membrane fractions, whereas the bulk unmodified G(alphai)-protein was largely excluded. This effect required palmitoyltransferase activity and was abolished if the palmitoylated cysteine was mutated. Thus, palmitoyltransferase facilitates the enrichment of fatty acylated signaling molecules in plasma membrane subdomains.