Squalene epoxidase (Erg1p) is an essential enzyme in the ergosterol biosynthesis pathway in yeast. For its enzymatic activity, Erg1p requires molecular oxygen, NAD(P)H and FAD. Amino acid analysis and sequence alignment with other squalene epoxidases revealed two highly conserved FAD-binding domains, FAD I and FAD II. By random PCR mutagenesis of the ERG1 gene, one erg1 allele was isolated that carries a mutation leading to a single amino acid exchange in the FAD I domain close to the N-terminus of Erg1p. This erg1 allele codes for functional squalene epoxidase and renders yeast cells hypersensitive to terbinafine. Amino acid exchanges of other conserved residues in the FAD I and FAD II regions either led to non-functional squalene epoxidase or to the formation of squalene epoxidase with wild-type properties. These results describe the importance of specific amino acids for enzymatic activity in the yeast squalene epoxidase Erg1p.