Sulfatases contain an active site formylglycine residue that is generated by post-translational modification. Crystal structures of two lysosomal sulfatases revealed significant similarity to the catalytic site of alkaline phosphatase containing a serine at the position of formylglycine. To elucidate the catalytic mechanism of sulfate ester hydrolysis, the formylglycine of arylsulfatases A and B was substituted by serine. These mutants upon incubation with substrate were covalently sulfated at the introduced serine. This sulfated enzyme intermediate was stable at pH 5. At alkaline pH it was slowly hydrolyzed. These characteristics are analogous to that of alkaline phosphatase which forms a phosphoserine intermediate that is stable at pH 5, but is hydrolyzed at alkaline pH. In wild-type sulfatases the hydroxyl needed for formation of the sulfated enzyme intermediate is provided by the aldehyde hydrate of the formylglycine. The second, non-esterified hydroxyl of the aldehyde hydrate is essential for rapid desulfation of the enzyme at acidic pH, which most likely occurs by elimination. The lack of this second hydroxyl in the serine mutants explains the trapping of the sulfated enzyme intermediate. Thus, in acting as a geminal diol the formylglycine residue allows for efficient ester hydrolysis in an acidic milieu.