Recent studies have indicated a role for caveolin in regulating cholesterol-dependent signaling events. In the present study we have analyzed the role of caveolins in intracellular cholesterol cycling using a dominant negative caveolin mutant. The mutant caveolin protein, cav-3(DGV), specifically associates with the membrane surrounding large lipid droplets. These structures contain neutral lipids, and are accessed by caveolin 1-3 upon overexpression. Fluorescence, electron, and video microscopy observations are consistent with formation of the membrane-enclosed lipid rich structures by maturation of subdomains of the ER. The caveolin mutant causes the intracellular accumulation of free cholesterol (FC) in late endosomes, a decrease in surface cholesterol and a decrease in cholesterol efflux and synthesis. The amphiphile U18666A acts synergistically with cav(DGV) to increase intracellular accumulation of FC. Incubation of cells with oleic acid induces a significant accumulation of full-length caveolins in the enlarged lipid droplets. We conclude that caveolin can associate with the membrane surrounding lipid droplets and is a key component involved in intracellular cholesterol balance and lipid transport in fibroblasts.