Lipid droplets (LDs) are conserved organelles for intracellular neutral lipid storage. Recent studies suggest that LDs function as direct lipid sources for autophagy, a central catabolic process in homeostasis and stress response. Here, we demonstrate that LDs are dispensable as a membrane source for autophagy, but fulfill critical functions for endoplasmic reticulum (ER) homeostasis linked to autophagy regulation. In the absence of LDs, yeast cells display alterations in their phospholipid composition and fail to buffer de novo fatty acid (FA) synthesis causing chronic stress and morphologic changes in the ER. These defects compromise regulation of autophagy, including formation of multiple aberrant Atg8 puncta and drastically impaired autophagosome biogenesis, leading to severe defects in nutrient stress survival. Importantly, metabolically corrected phospholipid composition and improved FA resistance of LD-deficient cells cure autophagy and cell survival. Together, our findings provide novel insight into the complex interrelation between LD-mediated lipid homeostasis and the regulation of autophagy potentially relevant for neurodegenerative and metabolic diseases.