It was previously observed that cell confluence induced up-regulation of neutral sphingomyelinase 2 (nSMase2) and increased ceramide levels [Marchesini N., Osta W., Bielawski J., Luberto C., Obeid L.M. and Hannun Y.A. (2004) J. Biol. Chem., 279, 25101-11]. In this study, we show that, in MCF7 cells, confluence induces the dephosphorylation of phosphorylated-beta-catenin at threonine41/serine45. The effect of confluence on beta-catenin dephosphorylation was prevented by down regulation of nSMase2 using siRNA; reciprocally, exogenous addition of short or very long chain ceramides induced dephosphorylation of beta-catenin. The serine/threonine protein phosphatase inhibitors calyculin A and okadaic acid prevented beta-catenin dephosphorylation during confluence. The specific phosphatase involved was determined by studies using siRNA against the major serine/threonine phosphatases, and the results showed that a specific siRNA against PP1cgamma prevented dephosphorylation of beta-catenin. Moreover, exogenous ceramides and confluence were found to induce the translocation of PP1cgamma to the plasma membrane. All together these results establish: A) a specific intracellular pathway involving the activation of PP1 to mediate the effects of confluence-induced beta-catenin dephosphorylation and B) PP1 as a lipid-regulated protein phosphatase downstream of nSMase2/ceramide. Finally, evidence is provided for a role for this pathway in regulating cell motility during confluence.