In this study, we identified and characterized mitochondrial alcohol dehydrogenase 3 from the thermotolerant methylotrophic yeast Hansenula polymorpha (HpADH3). The amino acid sequence of HpADH3 shares over 70% of its identity with the alcohol dehydrogenases of other yeasts and exhibits the highest similarity of 91% with the alcohol dehydrogenase 1 of H. polymorpha. However, unlike the cytosolic HpADH1, HpADH3 appears to be a mitochondrial enzyme, as a mitochondrial targeting extension exists at its N terminus. The recombinant HpADH3 overexpressed in Escherichia coli showed similar catalytic efficiencies for ethanol oxidation and acetaldehyde reduction. The HpADH3 displayed substrate specificities with clear preferences for medium chain length primary alcohols and acetaldehyde for an oxidation reaction and a reduction reaction, respectively. Although the H. polymorpha ADH3 gene was induced by ethanol in the culture medium, both an ADH isozyme pattern analysis and an ADH activity assay indicated that HpADH3 is not the major ADH in H. polymorpha DL-1. Moreover, HpADH3 deletion did not affect the cell growth on different carbon sources. However, when the HpADH3 mutant was complemented by an HpADH3 expression cassette fused to a strong constitutive promoter, the resulting strain produced a significantly increased amount of ethanol compared to the wild-type strain in a glucose medium. In contrast, in a xylose medium, the ethanol production was dramatically reduced in an HpADH3 overproduction strain compared to that in the wild-type strain. Taken together, our results suggest that the expression of HpADH3 would be an ideal engineering target to develop H. polymorpha as a substrate specific bioethanol production strain.