A variety of signal transduction pathways including PI turnover, MAP kinase activation, and PI 3-kinase activation have been shown to be affected by changes in cellular cholesterol content. However, no information is available regarding the locus (or loci) in the pathways that are susceptible to modulation by cholesterol. We report here that depletion of cholesterol with methyl-beta-cyclodextrin increases cell surface (125)I-EGF binding by approximately 40% via a mechanism that does not involve externalization of receptors from an internal pool. Cholesterol depletion also enhances in vivo EGF receptor autophosphorylation 2-5-fold without altering the rate of receptor dephosphorylation. In vitro kinase assays, which are done under conditions where phosphotyrosine phosphatases are inhibited and receptor trafficking cannot occur, demonstrate that treatment with methyl-beta-cyclodextrin leads to an increase in intrinsic EGF receptor tyrosine kinase activity. EGF receptors are localized in cholesterol-enriched lipid rafts but are released from this compartment upon treatment with methyl-beta-cyclodextrin. These data are consistent with the interpretation that localization to lipid rafts partially suppresses the binding and kinase functions of the EGF receptor and that depletion of cholesterol releases the receptor from lipid rafts, relieving the functional inhibition of the receptor. Cholesterol depletion also inhibits EGF internalization and down-regulation of the EGF receptor, and this likely contributes to the enhanced ability of EGF to stimulate downstream signaling pathways such as the activation of MAP kinase.