It has been suggested that cellular cholesterol levels can modulate the metabolism of the amyloid precursor protein (APP) but the underlying mechanism remains controversial. In the current study, we investigate in detail the relationship between cholesterol reduction, APP processing and gamma-secretase function in cell culture studies. We found that mild membrane cholesterol reduction led to a decrease in Abeta(40) and Abeta(42) in different cell types. We did not detect changes in APP intracellular domain or Notch intracellular domain generation. Western blot analyses showed a cholesterol-dependent decrease in the APP C-terminal fragments and cell surface APP. Finally, we applied a fluorescence resonance energy transfer (FRET)-based technique to study APP-Presenilin 1 (PS1) interactions and lipid rafts in intact cells. Our data indicate that cholesterol depletion reduces association of APP into lipid rafts and disrupts APP-PS1 interaction. Taken together, our results suggest that mild membrane cholesterol reduction impacts the cleavage of APP upstream of gamma-secretase and appears to be mediated by changes in APP trafficking and partitioning into lipid rafts.