Ceramide has been recognized as a common intracellular second messenger for various cytokines, growth factors and other stimuli, such as CD95, chemotherapeutic drugs and stress factors. To understand the role of ceramide during apoptosis and other cellular responses, it is critically important to characterize direct targets of ceramide action. In this paper, we show that ceramide specifically binds to and activates the endosomal acidic aspartate protease cathepsin D. Direct interaction of ceramide with cathepsin D results in autocatalytic proteolysis of the 52 kDa pre-pro cathepsin D to form the enzymatically active 48/32 kDa isoforms of cathepsin D. Acid sphingomyelinase (A-SMase)-deficient cells show decreased cathepsin D activity, which could be reconstituted by transfection with A-SMase cDNA. The results of our study identify cathepsin D as the first endosomal ceramide target that colocalizes with and may mediate downstream signaling effects of A-SMase.