N-terminal acylation of the alpha-subunits of heterotrimeric G-proteins is believed to play a major role in regulating the cellular localization and signaling of G-proteins, but physiological evidence has been lacking. To examine the functional significance of N-acylation of a well understood G-protein alpha-subunit, transducin (G alpha(t)), we generated transgenic mice that expressed a mutant G alpha(t) lacking N-terminal acylation sequence (G alpha(t)G2A). Rods expressing G alpha(t)G2A showed a severe defect in transducin cellular localization. In contrast to native G alpha(t), which resides in the outer segments of dark-adapted rods, G alpha(t)G2A was found predominantly in the inner compartments of the photoreceptor cells. Remarkably, transgenic rods with the outer segments containing G alpha(t)G2A at 5-6% of the G alpha(t) levels in wild-type rods showed only a sixfold reduction in sensitivity and a threefold decrease in the amplification constant. The much smaller than predicted reduction may reflect an increase in the lateral diffusion of transducin and an increased activation rate by photoexcited rhodopsin or more efficient activation of cGMP phosphodiesterase 6 by G alpha(t)G2A; alternatively, nonlinear relationships between concentration and the activation rate of transducin also potentially contribute to the mismatch between the amplification constant and quantitative expression analysis of G alpha(t)G2A rods. Furthermore, the G2A mutation reduced the GTPase activity of transducin and resulted in two to three times slower than normal recovery of flash responses of transgenic rods, indicating the role of G alpha(t) membrane tethering for its efficient inactivation by the regulator of G-protein signaling 9 GTPase-activating protein complex. Thus, N-acylation is critical for correct compartmentalization of transducin and controls the rate of its deactivation.