3-Hydroxybutyrate dehydrogenase is a lipid-requiring enzyme with an absolute requirement of lecithin for function. The enzyme contains two sulfhydryl groups per monomer. Modification of the more reactive sulfhydryl group with N-ethylmaleimide resulted in inactivation of the enzyme and modification of coenzyme-binding characteristics [McIntyre, J. O., Fleer, E. A. M. and Fleischer, S. (1984) Biochemistry 23, 5135-5141]. The present study further investigates the function of the sulfhydryl groups by utilizing chemical derivatization techniques. The reactive sulfhydryl was derivatized first with 3,3'-dithiobis(6-nitrobenzoic acid) (Ellman's reagent) to form the S-(carboxynitrophenylthio) derivative which could then be replaced with cyanide to form the S-cyanylated enzyme. We find that derivatizing the essential sulfhydryl group leads to some loss of activity. The effect appears to be steric since a larger derivatizing group gives greater loss of activity. The normal enzyme is inhibited approximately 50% in excess substrate. Derivatization of the reactive sulfhydryl group results in loss of this substrate inhibition, the modified enzyme being at least three-fold more active at high substrate concentrations; the activity increases from 18% to 54% and from 1% to 4% of maximal activity for the S-cyanylated and S-(carboxynitrophenylthio) enzyme derivatives, respectively. Cyanylation results in complete loss of fluorescence energy transfer from tryptophan to NADH at low salt concentration but is normal in the presence of 100mM NaCl. However, the binding constant of the coenzyme is decreased only several-fold in the cyanylated enzyme as studied by fluorescence quenching. The cyanylated enzyme formed tight ternary complexes (spin-labeled NADH-monomethylmalonate) (spin-labeled NAD-sulfite) similar to that formed by the normal enzyme. The spin label is highly immobilized, but the hyperfine splitting values differ somewhat from the normal enzyme. We conclude that the reactive sulfhydryl is close to the active site of 3-hydroxybutyrate dehydrogenase but is not involved in the catalytic mechanism.