The sphingolipid biosynthetic pathway generates bioactive molecules crucial to the regulation of mammalian and fungal physiological and pathobiological processes. In previous studies (Luberto, C., Toffaletti, D. L., Wills, E. A., Tucker, S. C., Casadevall, A., Perfect, J. R., Hannun, Y. A., and Del Poeta, M. (2001) Genes Dev. 15, 201-212), we demonstrated that an enzyme of the fungal sphingolipid pathway, Ipc1 (inositol-phosphorylceramide synthase-1), regulates melanin, a pigment required for the pathogenic fungus Cryptococcus neoformans to cause disease. In this study, we investigated the mechanism by which Ipc1 regulates melanin production. Because Ipc1 also catalyzes the production of diacylglycerol (DAG), a physiological activator of the classical and novel isoforms of mammalian protein kinase C (PKC), and because it has been suggested that PKC is required for melanogenesis in mammalian cells, we investigated whether Ipc1 regulates melanin in C. neoformans through the production of DAG and the subsequent activation of Pkc1, the fungal homolog of mammalian PKC. The results show that modulation of Ipc1 regulates the levels of DAG in C. neoformans cells. Next, we demonstrated that C. neoformans Pkc1 is a DAG-activated serine/threonine kinase and that the C1 domain of Pkc1 is necessary for this activation. Finally, through both pharmacological and genetic approaches, we found that inhibition of Pkc1 abolishes melanin formation in C. neoformans. This study identifies a novel signaling pathway in which C. neoformans Ipc1 plays a key role in the activation of Pkc1 through the formation of DAG. Importantly, this pathway is essential for melanin production with implications for the pathogenicity of C. neoformans.