Previously we reported that when cell cholesterol is acutely lowered with beta-methyl-cyclodextrin the amount of activated ERK1/2 in caveolae dramatically increases. We traced the origin of this novel method of pERK1/2 accumulation to a macromolecular complex with dual specific phosphatase activity that contains the serine/threonine phosphatase PP2A, the tyrosine phosphatase HePTP, the oxysterol-binding protein OSBP and cholesterol. When cell cholesterol is lowered, or oxysterols is introduced, the complex disassembles and pERK1/2 increases. In an effort to better understand how OSBP functions as a cholesterol-regulated scaffolding protein, we have mapped the functional parts of the molecule. The command center of the molecule is a centrally located, 51 amino acids (408-459) long sterol-binding domain that can bind both cholesterol and 25-hydroxycholesterol. This domain is functional whether attached to the N- or the C-terminal half of OSBP. Introduction of a Y458S mutation impairs binding. Even though 25-hydroxycholesterol will compete for cholesterol binding to OSBP(408-809), it will not compete for cholesterol binding in full-length OSBP. Upon further analysis we found that a glycine-alaninerich region at the N-terminal end of OSBP works with the PH domain to control cholesterol binding without affecting 25-hydroxycholesterol binding. Finally, we found that HePTP and PP2A bind the C-terminal half of OSBP, HePTP binds a coiled-coil domain (amino acids 732-761), and PP2A binds neither the coiled-coil nor HePTP. On the basis of this information we propose a new model for how OSBP is able to sense both membrane cholesterol and oxidized sterols and link this information to the ERK1/2 signaling pathway.