The lovastatin hydrolase PcEST from the fungus Penicillium chrysogenum exhibits enormous potential for industrial-scale applications in single-step production of monacolin J, the key precursor for synthesis of the cholesterol-lowering drug simvastatin. This enzyme specifically and efficiently catalyzes the conversion of lovastatin to monacolin J but cannot hydrolyze simvastatin. Understanding the catalytic mechanism and the structure-function relationship of PcEST is therefore important for further lovastatin hydrolase screening, engineering, and commercial applications. Here, we solved four X-ray crystal structures, including apo PcEST (2.3 Å), PcEST in complex with monacolin J (2.48 Å), PcEST complexed with the substrate analog simvastatin (2.4 Å), and an inactivated PcEST variant (S57A) with the lovastatin substrate (2.3 Å). Structure-based biochemical analyses and mutagenesis assays revealed that the Ser57 (nucleophile)-Tyr170 (general base)-Lys60 (general acid) catalytic triad, the hydrogen-bond network (Trp344 and Tyr127) around the active site, and the specific substrate-binding tunnel together determine efficient and specific lovastatin hydrolysis by PcEST. Moreover, steric effects on nucleophilic attack caused by the 2',2-dimethybutyryl group of simvastatin resulted in no activity of PcEST on simvastatin. On the basis of structural comparisons, we propose several indicators to define lovastatin esterases. Furthermore, using structure-guided enzyme engineering, we developed a PcEST variant, D106A, having improved solubility and thermostability, suggesting a promising application of this variant in industrial processes. To our knowledge, this is the first report describing the mechanism and structure-function relationship of lovastatin hydrolase and providing insights that may guide rapid screening and engineering of additional lovastatin esterase variants.