Amyloid beta-peptide (Abeta), Abeta precursor protein (APP), apolipoprotein E (apoE), and elevated cholesterol levels have been linked to Alzheimer's disease (AD) pathology. High cholesterol levels increase APP and apoE expression in human NT2 neuron progenitor cells. A cholesterol-rich environment also induces processing of APP, leading to the formation of Abeta and Abeta peptide fragments. Using a novel method, we determined that 1) cholesterol binds to Abeta at alpha-secretase cleavage site; 2) Abeta17-40 rather than Abeta1-40 prevents cholesterol from binding to apoE; 3) Abeta1-40 inhibits cholesterol from binding to low-density lipoprotein (LDL), leading to decrease cholesterol influx and intracellular cholesterol levels; 4) the binding of cholesterol to apoE or LDL was abolished completely in presence of Abeta1-42. Increased extracellular free cholesterol levels are toxic to neurons; this toxicity is prevented by specific lipoproteins, such as high-density lipoproteins, which maintain their ability to bind cholesterol in the presence of Abeta. We propose that one of the physiological functions of Abeta and APP is to control cholesterol transport. AD is associated with increased Abeta production. High cholesterol levels also lead to overproduction of Abeta. Abeta blocks cholesterol trafficking and changes cholesterol homeostasis leading to neurodegeneration and the onset and/or progression of AD pathology.