Type III secretion is a widespread method whereby Gram-negative bacteria introduce toxins into eukaryotic cells. These toxins mimic or subvert a normal cellular process by interacting with a specific target, although how toxins reach their site of action is unclear. We set out to investigate the intracellular localization of a type III toxin of Pseudomonas aeruginosa called ExoU, which has phospholipase activity and requires a eukaryotic factor for activity. We found that ExoU is localized to the plasma membrane and undergoes modification within the cell by addition of two ubiquitin molecules at lysine-178. A region of five amino acids at position 679-683 near the C-terminus of the ExoU protein controls both membrane localization and ubiquitinylation. Site-directed mutagenesis identified a tryptophan at position 681 as crucial for these effects. We found that the same region at position 679-683 was also required for cell toxicity produced by ExoU as well as in vitro phospholipase activity. Localization of the phospholipase ExoU to the plasma membrane is thus required for activation and allows efficient utilization of adjacent substrate phospholipids.