Postsynaptic density protein 95 (PSD-95/SAP-90) is a palmitoylated membrane-associated guanylate kinase that oligomerizes and clusters ion channels and associated signaling machinery at excitatory synapses in brain. However, the mechanism for PSD-95 oligomerization and its relationship to ion channel clustering remain uncertain. Here, we find that multimerization of PSD-95 is determined by only its first 13 amino acids, which also have a remarkable capacity to oligomerize heterologous proteins. Multimerization does not involve a covalent linkage but rather palmitoylation of two cysteine residues in the 13 amino acid motif. This lipid-mediated oligomerization is a specific property of the PSD-95 motif, because it is not observed with other palmitoylated domains. Clustering K+ channel Kv1.4 requires interaction of palmitoylated PSD-95 with tetrameric K+ channel subunits but, surprisingly, does not require multimerization of PSD-95. Finally, disrupting palmitoylation with 2-bromopalmitate disperses PSD-95/K+-channel clusters. These data suggest new models for K+ channel clustering by PSD-95 - a reversible process regulated by protein palmitoylation.