Autophagy dysfunction has been implicated in misfolded protein accumulation and cellular toxicity in several diseases. Whether alterations in autophagy also contribute to the pathology of lipid-storage disorders is not clear. Here, we show defective autophagy in Niemann-Pick type C1 (NPC1) disease associated with cholesterol accumulation, where the maturation of autophagosomes is impaired because of defective amphisome formation caused by failure in SNARE machinery, whereas the lysosomal proteolytic function remains unaffected. Expression of functional NPC1 protein rescues this defect. Inhibition of autophagy also causes cholesterol accumulation. Compromised autophagy was seen in disease-affected organs of Npc1 mutant mice. Of potential therapeutic relevance is that HP-β-cyclodextrin, which is used for cholesterol-depletion treatment, impedes autophagy, whereas stimulating autophagy restores its function independent of amphisome formation. Our data suggest that a low dose of HP-β-cyclodextrin that does not perturb autophagy, coupled with an autophagy inducer, may provide a rational treatment strategy for NPC1 disease.