Objectives Development of a system for direct lactose to ethanol fermentation provides a market for the massive amounts of underutilized whey permeate made by the dairy industry. For this system, glucose and galactose metabolism were uncoupled in Saccharomyces cerevisiae by deleting two negative regulatory genes, GAL80 and MIG1, and introducing the essential lactose hydrolase LAC4 and lactose transporter LAC12, from the native but inefficient lactose fermenting yeast Kluyveromyces marxianus. Results Previously, integration of the LAC4 and LAC12 genes into the MIG1 and NTH1 loci was achieved to construct strain AY-51024M. Low rates of lactose conversion led us to generate the Delta mig1 Delta gal80 diploid mutant strain AY-GM from AY-5, which exhibited loss of diauxic growth and glucose repression, subsequently taking up galactose for consumption at a significantly higher rate and yielding higher ethanol concentrations than strain AY-51024M. Similarly, in cheese whey permeate powder solution (CWPS) during three, repeated, batch processes in a 5L bioreactor containing either 100 g/L or 150 g/L lactose, the lactose uptake and ethanol productivity rates were both significantly greater than that of AY-51024M, while the overall fermentation times were considerably lower. Conclusions Using the Cre-loxp system for deletion of the MIG1 and GAL80 genes to relieve glucose repression, and LAC4 and LAC12 overexpression to increase lactose uptake and conversion provides an efficient basis for yeast fermentation of whey permeate by-product into ethanol.