Although the free radical-mediated oxidation of free cholesterol (FC) is critical in the generation of regulatory sterols and in atherogenesis, the physiological regulation of this process is poorly understood. We tested the hypothesis that sphingomyelin (SM), a major phospholipid of cell membranes, which is closely associated with FC, protects FC against oxidation, because of its unique structure, and affinity to the sterol. We employed phosphatidylcholine (PC) liposomes containing varying amounts of SM, and either radioactive FC or a fluorescent analog, dehydroergosterol (DHE), and determined the oxidative decay of the sterol in presence of 2,2'-azo-bis(2-amidinopropane hydrochloride) (AAPH). Incorporation of 25 mol% of SM in the liposomes inhibited the oxidation of FC or DHE by up to 50%. This inhibition was specific for SM among phospholipids, and was abolished by sphingomyelinase treatment. SM was not degraded during the oxidation reaction, and its effect was not dependent on the nature of the oxidizing agent, because it also inhibited sterol oxidation by FeSO(4)/ascorbate, and by cholesterol oxidase. These studies show that SM plays a physiological role in the regulation of cholesterol oxidation by free radicals.