The gene EPXH2 encodes for the soluble epoxide hydrolase (sEH), an enzyme involved in the regulation of cardiovascular and renal physiology containing two distinct domains connected via a proline-rich linker. The C-terminal domain containing the EH catalytic activity has been well studied. In contrast, a function for the N-terminal domain, which has high homology to the haloacid dehalogenase family of phosphatases, has not been definitively reported. In this study we describe the N-terminal domain as a functional phosphatase unaffected by a number of classic phosphatase inhibitors. Assuming a functional association between these catalytic activities, dihydroxy lipid phosphates were rationalized as potential endogenous substrates. A series of phosphorylated hydroxy lipids were therefore synthesized and found to be excellent substrates for the human sEH. The best substrate tested was the monophosphate of dihydroxy stearic acid (threo-910-phosphonoxy-hydroxy-octadecanoic acid) with K(m) = 21 +/- 0.3 microM, V(Max) = 338 +/- 12 nmol x min(-1) x mg(-1), and k(cat) = 0.35 +/- 0.01 s(-1). Therefore dihydroxy lipid phosphates are possible candidates for the endogenous substrates of the sEH N-terminal domain, which would represent a novel branch of fatty acid metabolism with potential signaling functions.