Specific point mutations in caveolin-3, a predominantly muscle-specific member of the caveolin family, have been implicated in limb-girdle muscular dystrophy and in rippling muscle disease. We examined the effect of these mutations on caveolin-3 localization and function. Using two independent assay systems, Raf activation in fibroblasts and neurite extension in PC12 cells, we show that one of the caveolin-3 point mutants, caveolin-3-C71W, specifically inhibits signaling by activated H-Ras but not by K-Ras. To gain insights into the effect of the mutant protein on H-Ras signaling, we examined the localization of the mutant proteins in fibroblastic cells and in differentiating myotubes. Unlike the previously characterized caveolin-3-DGV mutant, the inhibitory caveolin-3-C71W mutant reached the plasma membrane and colocalized with wild type caveolins. In BHK cells, caveolin-3-C71W associated with caveolae and in differentiating muscle cells with the developing T-tubule system. In contrast, the caveolin-3-P104L mutant accumulated in the Golgi complex and had no effect on H-Ras-mediated Raf activation. Inhibition by caveolin-3-C71W was rescued by cholesterol addition, suggesting that the mutant protein perturbs cholesterol-rich raft domains. Thus, we have demonstrated that a naturally occurring caveolin-3 mutation can inhibit signaling involving cholesterol-sensitive raft domains.