A major protein of neuronal rafts, NAP-22, binds specifically to cholesterol. We demonstrate by circular dichroism that NAP-22 contains a significant amount of beta-structure that is not sensitive to binding of the protein to membranes, suggesting that a major portion of the protein does not insert deeply into the membrane. The free energy of binding of NAP-22 to liposomes of dioleoylphosphatidylcholine with 40% cholesterol is -7.3 +/- 0.5 kcal/mol. NAP-22 mixed with dipalmitoylphosphatidylcholine and 40% cholesterol partitions into the detergent insoluble fraction in the presence of 1% Triton X-100. NAP-22 also causes this insoluble fraction to become enriched in cholesterol relative to phospholipid, again demonstrating the ability of this protein to segregate cholesterol and phospholipids into domains. Differential scanning calorimetry results demonstrate that NAP-22 promotes domain formation in liposomes composed of cholesterol and phosphatidylcholine. This is shown by NAP-22-promoted changes in the shape and enthalpy of the phase transition of phosphatidylcholine as well as by the appearance of cholesterol crystallite transitions in membranes composed of phosphatidylcholine with either saturated or unsaturated acyl chains. In situ atomic force microscopy revealed a marked change in the surface morphology of a supported bilayer of dioleoylphosphatidylcholine with 0.4 mole fraction of cholesterol upon addition of NAP-22. Prior to the addition of the protein, the bilayer appears to be a molecularly smooth structure with uniform thickness. Addition of NAP-22 resulted in the rapid formation of localized raised bilayer domains. Remarkably, there was no gross disruption or erosion of the bilayer but rather simply an apparent rearrangement of the lipid bilayer structure due to the interaction of NAP-22 with the lipid. Our results demonstrate that NAP-22 can induce the formation of cholesterol-rich domains in membranes. This is likely to be relevant in neuronal membrane domains that are rich in NAP-22.