Rab GTPases, key regulators of membrane targeting and fusion, require the covalent attachment of geranylgeranyl lipids to their C terminus for function. To elucidate the role of lipid in Rab recycling, we have determined the crystal structure of Rab guanine nucleotide dissociation inhibitor (alphaGDI) in complex with a geranylgeranyl (GG) ligand (H(2)N-Cys-(S-GG)-OMe). The lipid is bound beneath the Rab binding platform in a shallow hydrophobic groove. Mutation of the binding pocket in the brain-specific alphaGDI leads to mental retardation. Strikingly, lipid binding acts through a conserved allosteric switching mechanism to promote release of the GDI-Rab[GDP] complex from the membrane.