Lipid molecules surround an ion channel in its native environment of cellular membranes. The importance of the lipid bilayer and the role of lipid protein interactions in ion channel structure and function are not well understood. Here we demonstrate that the bacterial potassium channel KcsA binds a negatively charged lipid molecule. We have defined the potential binding site of the lipid molecule on KcsA by X-ray crystallographic analysis of a complex of KcsA with a monoclonal antibody Fab fragment. We also demonstrate that lipids are required for the in vitro refolding of the KcsA tetramer from the unfolded monomeric state. The correct refolding of the KcsA tetramer requires lipids, but it is not dependent on negatively charged lipids as refolding takes place in the absence of such lipids. We confirm that the presence of negatively charged lipids is required for ion conduction through the KcsA potassium channel, suggesting that the lipid bound to KcsA is important for ion channel function.