Rats fed a diet containing 1.25% elemental tellurium initiated on postnatal day 20 undergo a transient neuropathy characterized by synchronous demyelination of peripheral nerves. In sciatic nerve, the extent of demyelination was maximal after 5 days of tellurium exposure; there was a loss of 25% of the myelin, as assayed by concentration of myelin-specific P0 protein. Tellurium-induced alterations in the metabolic capacity of Schwann cells were examined by measuring the synthesis of myelin lipids in vitro in isolated sciatic nerve segments. Exposure to tellurium resulted in an early marked decrease of approximately 50% in overall incorporation of [14C]acetate into lipids, with a preferential depression in synthesis of cerebrosides, cholesterol, and ethanolamine plasmalogens (components enriched in myelin). Most dramatically, within 1 day of initiation of tellurium exposure, there was a profound increase in [14C]acetate-derived radioactivity in squalene; 23% of incorporated label was in this intermediate of cholesterol biosynthesis, compared to less than 0.5% in controls. In association with the remyelinating phase seen after 5 days of tellurium exposure, synthesis of myelin components gradually returned to normal levels. After 30 days, metabolic and morphologic alterations were no longer apparent. We suggest that the sequence of metabolic events in sciatic nerve following tellurium treatment initially involves inhibition of the conversion of squalene to 2,3-epoxysqualene, and that this block in the cholesterol biosynthesis pathway results, either directly or indirectly, in the inhibition of the synthesis of myelin components and breakdown of myelin.