Bm3R1 is a helix-turn-helix transcriptional repressor from Bacillus megaterium whose binding to DNA is inhibited by fatty acids and a wide range of compounds that modulate lipid metabolism. The inactivation of Bm3R1/DNA binding activity results in the activation of transcription of the operon encoding a fatty acid hydroxylase, cytochrome P450 102. The metabolic role of this operon is unknown. It is possible that it is involved in the synthesis of modified fatty acids as part of normal cellular metabolism or may represent a protective mechanism by which B. megaterium detoxifies harmful foreign lipids. In this report we demonstrate that polyunsaturated fatty acids (PUFA) activate the transcription of the CYP102 operon. These PUFA are the most potent activators of the CYP102 operon observed to date, and we show that their effects are due to binding directly to Bm3R1. In addition, cultures that have been treated with the CYP102 inducer, nafenopin, are protected against PUFA toxicity. Resistance to PUFA toxicity is also seen in a Bm3R1-deficient strain that constitutively expresses CYP102. The resistant phenotype of this Bm3R1 mutant strain is reversed by specific chemical inactivation of CYP102. These data demonstrate that Bm3R1 can act as a direct sensor of toxic fatty acids and, in addition, provide the first direct evidence of fatty acids binding to a prokaryotic transcription factor.