Multidrug resistance in the yeast Saccharomyces cerevisiae is sensitive to the mitochondrial genome status of cells. Cells that lose their organellar genome ([rho(0)] cells) dramatically induce transcription of multiple or pleiotropic drug resistance genes via increased expression of a zinc cluster-containing transcription factor designated Pdr3. A major Pdr3 target gene is the ATP-binding cassette transporter-encoding gene PDR5. Pdr5 has been demonstrated to act as a phospholipid floppase catalyzing the net outward movement of phosphatidylethanolamine (PE). Since the mitochondrially localized Psd1 enzyme provides a major route of PE biosynthesis, we evaluated the potential linkage between Psd1 function and PDR5 regulation. Overproduction of Psd1 in wild-type ([rho(+)]) cells was found to induce PDR5 transcription and drug resistance in a Pdr3-dependent manner. Loss of the PSD1 gene from [rho(0)] cells prevented the normal activation of PDR5 expression. Surprisingly, expression of a catalytically inactive form of Psd1 still supported PDR5 transcriptional activation, suggesting that PE levels were not the signal triggering PDR5 induction. Expression of green fluorescent protein fusions mapped the region required to induce PDR5 expression to the noncatalytic amino-terminal portion of Psd1. Psd1 is a novel bifunctional protein required both for PE biosynthesis and regulation of multidrug resistance.