Background: Plasmodium falciparum is the pathogen responsible for the most devastating form of human malaria. As it replicates asexually in the erythrocytes of its human host, the parasite feeds on haemoglobin uptaken from these cells. Heme, a toxic by-product of haemoglobin utilization by the parasite, is neutralized into inert hemozoin in the food vacuole of the parasite. Lipid homeostasis and phospholipid metabolism are crucial for this process, as well as for the parasite's survival and propagation within the host. P. falciparum harbours a uniquely large family of phospholipases, which are suggested to play key roles in lipid metabolism and utilization. Results: Here, we show that one of the parasite phospholipase (P. falciparum lysophospholipase, PfLPL1) plays an essential role in lipid homeostasis linked with the haemoglobin degradation and heme conversion pathway. Fluorescence tagging showed that the PfLPL1 in infected blood cells localizes to dynamic vesicular structures that traffic from the host-parasite interface at the parasite periphery, through the cytosol, to get incorporated into a large vesicular lipid rich body next to the food-vacuole. PfLPL1 is shown to harbour enzymatic activity to catabolize phospholipids, and its transient downregulation in the parasite caused a significant reduction of neutral lipids in the food vacuole-associated lipid bodies. This hindered the conversion of heme, originating from host haemoglobin, into the hemozoin, and disrupted the parasite development cycle and parasite growth. Detailed lipidomic analyses of inducible knock-down parasites deciphered the functional role of PfLPL1 in generation of neutral lipid through recycling of phospholipids. Further, exogenous fatty-acids were able to complement downregulation of PfLPL1 to rescue the parasite growth as well as restore hemozoin levels. Conclusions: We found that the transient downregulation of PfLPL1 in the parasite disrupted lipid homeostasis and caused a reduction in neutral lipids essentially required for heme to hemozoin conversion. Our study suggests a crucial link between phospholipid catabolism and generation of neutral lipids (TAGs) with the host haemoglobin degradation pathway.