Ceramide is a membrane lipid involved in a number of crucial biological processes. Recent evidence suggests that ceramide is likely to reside and function within lipid rafts; ordered sphingolipid and cholesterol-rich lipid domains believed to exist within many eukaryotic cell membranes. Using lipid vesicles containing co-existing raft domains and disordered fluid domains, we find that natural and saturated synthetic ceramides displace sterols from rafts. Other raft lipids remain raft-associated in the presence of ceramide, showing displacement is relatively specific for sterols. Like cholesterol-containing rafts, ceramide-rich "rafts" remain in a highly ordered state. Comparison of the sterol-displacing abilities of natural ceramides with those of saturated diglycerides and an unsaturated ceramide demonstrates that tight lipid packing is critical for sterol displacement by ceramide. Based on these results, and the fact that cholesterol and ceramides both have small polar headgroups, we propose that ceramides and cholesterol compete for association with rafts because of a limited capacity of raft lipids with large headgroups to accommodate small headgroup lipids in a manner that prevents unfavorable contact between the hydrocarbon groups of the small headgroup lipids and the surrounding aqueous environment. Minimizing the exposure of cholesterol and ceramide to water may be a strong driving force for the association of other molecules with rafts. Furthermore, displacement of sterol from rafts by ceramide is very likely to have marked effects upon raft structure and function, altering liquid ordered properties as well as molecular composition. In this regard, certain previously observed physiological processes may be a result of displacement. In particular, a direct connection to the previously observed sphingomyelinase-induced displacement of cholesterol from plasma membranes in cells is proposed.