Here we investigate the molecular mechanisms that govern the targeting of G-protein alpha subunits to the plasma membrane. For this purpose, we used Gi1alpha as a model dually acylated G-protein. We fused full-length Gi1alpha or its extreme NH2-terminal domain (residues 1-32 or 1-122) to green fluorescent protein (GFP) and analyzed the subcellular localization of these fusion proteins. We show that the first 32 amino acids of Gi1alpha are sufficient to target GFP to caveolin-enriched domains of the plasma membrane in vivo, as demonstrated by co-fractionation and co-immunoprecipitation with caveolin-1. Interestingly, when dual acylation of this 32-amino acid domain was blocked by specific point mutations (G2A or C3S), the resulting GFP fusion proteins were localized to the cytoplasm and excluded from caveolin-rich regions. The myristoylated but nonpalmitoylated (C3S) chimera only partially partitioned into caveolin-containing fractions. However, both nonacylated GFP fusions (G2A and C3S) no longer co-immunoprecipitated with caveolin-1. Taken together, these results indicate that lipid modification of the NH2-terminal of Gi1alpha is essential for targeting to its correct destination and interaction with caveolin-1. Also, a caveolin-1 mutant lacking all three palmitoylation sites (C133S, C143S, and C156S) was unable to co-immunoprecipitate these dually acylated GFP-G-protein fusions. Thus, dual acylation of the NH2-terminal domain of Gi1alpha and palmitoylation of caveolin-1 are both required to stabilize and perhaps regulate this reciprocal interaction at the plasma membrane in vivo. Our results provide the first demonstration of a functional role for caveolin-1 palmitoylation in its interaction with signaling molecules.