The sphingolipid metabolites ceramide and sphingosine-1-phosphate are second messengers with opposing roles in mammalian cell growth arrest and survival; their relative cellular level has been proposed to be a rheostat that determines the fate of cells. This report demonstrates that this rheostat is an evolutionarily conserved stress-regulatory mechanism that influences growth and survival of yeast. Although the role of sphingosine-1-phosphate in yeast was not previously examined, accumulation of ceramide has been shown to induce G1 arrest and cell death. We now have identified a gene in Saccharomyces cerevisiae, LBP1, that regulates the levels of phosphorylated sphingoid bases and ceramide. LBP1 was cloned from a yeast mutant that accumulated phosphorylated long-chain sphingoid bases and diverted sphingoid base intermediates from sphingolipid pathways to glycerophospholipid biosynthesis. LBP1 and its homolog, LBP2, encode very hydrophobic proteins that contain a novel-conserved sequence motif for lipid phosphatases, and both have long-chain sphingoid base phosphate phosphatase activity. In vitro characterization of Lbp1p shows that this phosphatase is Mg2+-independent with high specificity for phosphorylated long-chain bases, phytosphingosine and sphingosine. The deletion of LBP1 results in the accumulation of phosphorylated long-chain sphingoid bases and reduced ceramide levels. Moreover, deletion of LBP1 and LBP2 results in dramatically enhanced survival upon severe heat shock. Thus, these phosphatases play a previously unappreciated role in regulating ceramide and phosphorylated sphingoid base levels in yeast, and they modulate stress responses through sphingolipid metabolites in a manner that is reminiscent of their effects on mammalian cells.