Glucocorticoids stimulate Na⁺ absorption by activation of the epithelial Na⁺/H⁺ exchanger NHE3 in the kidney and intestine. It has been thought that glucocorticoid-induced activation of NHE3 is solely dependent on transcriptional induction of the NHE3 gene. While the transcriptional regulation remains an essential part of the chronic effect of glucocorticoids, a previous study by us identified the serum- and glucocorticoid-inducible kinase 1 (SGK1) as an important component of the activation of NHE3 by glucocorticoids. In this work, we have demonstrated phosphorylation of NHE3 by SGK1 as the key mechanism for the stimulation of the transport activity by glucocorticoids. By using in vitro SGK1 kinase assay and site-directed mutagenesis, we have identified Ser663 of NHE3 to be the major site of phosphorylation by SGK1. Ser663 is invariantly conserved in all NHE3 proteins from several species, and the mutation of Ser663 to Ala blocks the effect of dexamethasone, demonstrating the importance of phosphorylation at Ser663. We also show that phosphorylation of NHE3 precedes the changes in NHE3 activity, and the increased activity is associated with an increased amount of NHE3 proteins in the surface membrane. These data reveal that dexamethasone activates NHE3 activity by phosphorylating the NHE3 protein, which initiates trafficking of the protein into the plasma membrane.