The targeting of ion channels to cholesterol-rich membrane microdomains has emerged as a novel mechanism of ion channel localization. Previously, we reported that Kv1.5, a prominent cardiovascular K(+) channel alpha-subunit, localizes to caveolar microdomains. However, the mechanisms regulating Kv1.5 targeting and the functional significance of this localization are largely unknown. In this study, we demonstrate a role for caveolin in the trafficking of Kv1.5 to lipid raft microdomains where cholesterol modulates channel function. In cells lacking endogenous caveolin-1 or -3, the association of Kv1.5 with low-density, detergent-resistant membrane fractions requires coexpression with exogenous caveolin, which can form channel-caveolin complexes. Caveolin is not required for cell surface expression, however, and caveolin-trafficking mutants sequester Kv1.5, but not Kv2.1, in intracellular compartments, resulting in a loss of functional cell surface channel. Coexpression with wild type caveolin-1 does not alter Kv1.5 current density; rather, it induces depolarizing shifts in steady-state activation and inactivation. These shifts are analogous to those produced by elevation of membrane cholesterol. Together, these results show that caveolin modulates channel function by regulating trafficking to cholesterol-rich membrane microdomains.