Lac operon is the gene regulatory system used by E.coli to digest the disaccharide lactose to glucose and galactose. So the ‘lac’ refers to lactose.
An operon is basically a regulatory system for genes in which a group of genes coding for like-functioning proteins are arranged linearly, and are under the control of a single regulator gene. When lactose is available to E.coli in its medium, the lac operon in the bacterial cell gets ‘switched on’, and works to break it down into glucose and galactose. In the absence of lactose, the operon would be in a ‘switched off’ mode, as there is nothing to be worked on.
The lac operon of E.coli consists of a promoter gene, operator gene and three structural genes, all of which work together to digest lactose. There is also a regulator gene which is usually present outside the operon, but is essential, as it codes for the repressor protein.