Background: Diacylglycerol (DG) kinase (DGK) phosphorylates DG to produce phosphatidic acid (PA). Of the 10 subtypes of mammalian DGKs, DGKβ is a membrane-localized subtype and abundantly expressed in the cerebral cortex, hippocampus, and caudate-putamen. However, its physiological roles in neurons and higher brain function have not been elucidated. Methodology/Principal Findings: We, therefore, developed DGKβ KO mice using the Sleeping Beauty transposon system, and found that its long-term potentiation in the hippocampal CA1 region was reduced, causing impairment of cognitive functions including spatial and long-term memories in Y-maze and Morris water-maze tests. The primary cultured hippocampal neurons from KO mice had less branches and spines compared to the wild type. This morphological impairment was rescued by overexpression of DGKb. In addition, overexpression of DGKβ in SH-SY5Y cells or primary cultured mouse hippocampal neurons resulted in branch- and spine-formation, while a splice variant form of DGKb, which has kinase activity but loses membrane localization, did not induce branches and spines. In the cells overexpressing DGKb but not the splice variant form, DGK product, PA, was increased and the substrate, DG, was decreased on the plasma membrane. Importantly, lower spine density and abnormality of PA and DG contents in the CA1 region of the KO mice were confirmed. Conclusions/Significance: These results demonstrate that membrane-localized DGKβ regulates spine formation by regulation of lipids, contributing to the maintenance of neural networks in synaptic transmission of cognitive processes including memory.