A method for fabricating a field effect transistor (FET) in and on a semiconductor substrate with local interconnects to permit the formation of minimal insulating space between polysilicon gate and the local interconnects by fabricating the source and drain of the FET and the local interconnects prior to forming the gate of the FET. A portion of an insulating layer between the source and drain is removed prior to forming the gate. Preferably, an etch stop layer on the semiconductor substrate underlying the insulating layer is used in the method.