Alzheimer's disease (AD) is characterized by accumulation of the neurotoxic peptide beta-amyloid, which is produced by proteolysis of amyloid precursor protein (APP). APP is a large membrane-bound copper-binding protein that is essential in maintaining synaptic function and may play a role in synaptogenesis. beta-Amyloid has been shown to contribute to the oxidative stress that accompanies AD. Later stages of AD are characterized by neuronal apoptosis. However, the biochemical function of APP and the mechanism of the toxicity of beta-amyloid are still unclear. In this study, we show that both beta-amyloid and APP can oxidize cholesterol to form 7beta-hydroxycholesterol, a proapoptotic oxysterol that was neurotoxic at nanomolar concentrations. 7beta-Hydroxycholesterol inhibited secretion of soluble APP from cultured rat hippocampal H19-7/IGF-IR neuronal cells and inhibited tumor necrosis factor-alpha-converting enzyme alpha-secretase activity but had no effect on beta-site APP-cleaving enzyme 1 activity. 7beta-Hydroxycholesterol was also a potent inhibitor of alpha-protein kinase C, with a K(i) of approximately 0.2 nm. The rate of reaction between cholesterol and beta-amyloid was comparable to the rates of cholesterol-metabolizing enzymes (k(cat) = 0.211 min(-)1). The rate of production of 7beta-hydroxycholesterol by APP was approximately 200 times lower than by beta-amyloid. Oxidation of cholesterol was accompanied by stoichiometric production of hydrogen peroxide and required divalent copper. The results suggest that a function of APP may be to produce low levels of 7-hydroxycholesterol. Higher levels produced by beta-amyloid could contribute to the oxidative stress and cell loss observed in Alzheimer's disease.