Tumor necrosis factor (TNF-alpha) stimulates a number of signal transduction pathways in which phospholipases produce lipid second messengers. However, the immediate molecular targets of these messengers, in particular those of ceramide and arachidonic acid (AA) and their role in TNF signaling are not well defined. In this study we investigated the relationship of ceramide and AA in regulating an atypical PKC isozyme, PKC zeta. U937 cells responding to TNF-alpha treatment with NF kappa B activation displayed enhanced phosphorylation of PKC zeta, which is already detectable 30 s after stimulation. [14C]ceramide specifically binds to and regulates kinase activity of PKC zeta in a biphasic manner. Binding studies indicate high and low affinity binding with bmax values of 60 and 600 nM and Kd values of 7.5 and 320 nM respectively. At ceramide concentrations as low as 0.5 nM an up to 4-fold increase in autophosphorylation is obtained, which, at concentrations > 60 nM, again declines to basal levels. Interestingly, AA competes for ceramide binding and inhibits basal and ceramide-stimulated PKC zeta kinase activity at < 100 nM. Metabolism of [14C]ceramide in cells is slow and is inhibited in the presence of equimolar concentrations of lyso-phosphatidylcholine. Based on the bifunctional modulation of PKC zeta by the lipid messengers ceramide and AA, a model of TNF signal pathways is suggested in which PKC zeta takes a central position, acting as a molecular switch between mitogenic and growth inhibitory signals of TNF-alpha.