The mechanism via which pneumolysin (PLY), a toxin and major virulence factor of the bacterium Streptococcus pneumoniae, binds to its putative receptor, cholesterol, is still poorly understood. We present results from a series of biophysical studies that shed light on the interaction of PLY with cholesterol in solution and in lipid bilayers. PLY lyses cells whose walls contain cholesterol. Using standard hemolytic assays we have demonstrated that the hemolytic activity of PLY is inhibited by cholesterol, partially by ergosterol but not by lanosterol and that the functional stoichiometry of the cholesterol-PLY complex is 1:1. Tryptophan (Trp) fluorescence data recorded during PLY-cholesterol titration studies confirm this ratio, reveal a significant blue shift in the Trp fluorescence peak with increasing cholesterol concentrations indicative of increasing nonpolarity in the Trp environment, consistent with cholesterol binding by the tryptophans, and provide a measure of the affinity of cholesterol binding: K(d) = 400 +/- 100 nM. Finally, we have performed specular neutron reflectivity studies to observe the effect of PLY upon lipid bilayer structure.