Membrane-anchored receptors are essential cellular signaling elements for stimulus sensing, propagation, and transmission inside cells. However, the contributions of lipid interactions to the function and dynamics of embedded receptor kinases have not been described in detail. In this study, we used amide hydrogen/deuterium exchange mass spectrometry, a sensitive biophysical approach, to probe the dynamics of a membrane-embedded receptor kinase, EnvZ, together with functional assays to describe the role of lipids in receptor kinase function. Our results reveal that lipids play an important role in regulating receptor function through interactions with transmembrane segments, as well as through peripheral interactions with nonembedded domains. Specifically, the lipid membrane allosterically modulates the activity of the embedded kinase by altering the dynamics of a glycine-rich motif that is critical for phosphotransfer from ATP. This allostery in EnvZ is independent of membrane composition and involves direct interactions with transmembrane and periplasmic segments, as well as peripheral interactions with nonembedded domains of the protein. In the absence of the membrane-spanning regions, lipid allostery is propagated entirely through peripheral interactions. Whereas lipid allostery impacts the phosphotransferase function of the kinase, extracellular stimulus recognition is mediated via a four-helix bundle subdomain located in the cytoplasm, which functions as the osmosensing core through osmolality-dependent helical stabilization. Our findings emphasize the functional modularity in a membrane-embedded kinase, separated into membrane association, phosphotransferase function, and stimulus recognition. These components are integrated through long-range communication relays, with lipids playing an essential role in regulation.