Squalene epoxidase is an essential enzyme in the ergosterol-biosynthesis pathway. It catalyzes the epoxidation of squalene to 2,3-oxidosqualene and is the specific target of the antifungal drug terbinafine. Treatment of yeast cells with this inhibitor leads to squalene accumulation and sterol depletion. As ergosterol fulfils several essential functions, each requiring optimal sterol concentrations, synthesis of sterols in yeast must be tightly regulated. This study focuses on the sterol-mediated regulation of expression of the ERG1 gene, which codes for squalene epoxidase in Saccharomyces cerevisiae. Inhibition of ergosterol biosynthesis with terbinafine increases the expression of ERG1 in a concentration-dependent manner to a maximum of sevenfold. Inhibition of later steps in the ergosterol-biosynthetic pathway by ketoconazole, an inhibitor of the lanosterol-14alpha-demethylase, and U18666A, an inhibitor of the squalene-2,3-epoxide-lanosterol cyclase, also induce expression of ERG1, suggesting that ERG1 expression is positively regulated by diminished intracellular ergosterol levels. The regulatory effect of sterols is manifested at the level of transcription. Deletion analysis of the ERG1 promoter identified a novel regulatory DNA sequence element. Two 6-bp direct repeats, separated by 4 bp, AGCTCGGCCGAGCTCG, are unique to the ERG1 promoter. A DNA fragment containing this region confers ergosterol-regulated expression on an otherwise unregulated CYC1 promoter construction. One copy of the 6-bp element, AGCTCG, is sufficient to confer regulation, albeit less effectively than when both elements are present, whereas the removal of both elements from the ERG1 promoter leads to the loss of sterol-dependent ERG1 regulation.