Defects in Niemann-Pick, Type C-1 protein (NPC1) cause cholesterol, sphingolipids, phospholipids, and glycolipids to accumulate in lysosomes of liver, spleen, and brain. In cultured fibroblasts, NPC1 deficiency causes lysosomal retention of lipoprotein-derived cholesterol after uptake by receptor-mediated endocytosis. NPC1 contains 1278 amino acids that form 13 membrane-spanning helices and three large loops that project into the lumen of lysosomes. We showed earlier that NPC1 binds cholesterol and oxysterols. Here we localize the binding site to luminal loop-1, a 240-amino acid domain with 18 cysteines. When produced in cultured cells, luminal loop-1 was secreted as a soluble dimer. This loop bound [(3)H]cholesterol (K(d), 130 nM) and [(3)H]25-hydroxycholesterol (25-HC, K(d), 10 nM) with one sterol binding site per dimer. Binding of both sterols was competed by oxysterols (24-, 25-, and 27-HC). Unlabeled cholesterol competed strongly for binding of [(3)H]cholesterol, but weakly for [(3)H]25-HC binding. Binding of [(3)H]cholesterol but not [(3)H]25-HC was inhibited by detergents. We also studied NPC2, a soluble protein whose deficiency causes a similar disease phenotype. NPC2 bound cholesterol, but not oxysterols. Epicholesterol and cholesteryl sulfate competed for [(3)H]cholesterol binding to NPC2, but not NPC1. Glutamine 79 in luminal loop-1 of NPC-1 is important for sterol binding; a Q79A mutation abolished binding of [(3)H]cholesterol and [(3)H]25-HC to full-length NPC1. Nevertheless, the Q79A mutant restored cholesterol transport to NPC1-deficient Chinese hamster ovary cells. Thus, the sterol binding site on luminal loop-1 is not essential for NPC1 function in fibroblasts, but it may function in other cells where NPC1 deficiency produces more complicated lipid abnormalities.