Allelic variation in the apolipoprotein E (APOE) gene is the major risk factor of sporadic Alzheimer disease. ApoE is the primary cholesterol carrier in the brain. Previously, we demonstrated that intracellular degradation of β-amyloid (Aβ) peptides by microglia is dramatically enhanced in the presence of apoE. However, the molecular mechanisms subserving this effect remain unknown. This study reports a mechanistic link between apoE-regulated cholesterol homeostasis and Aβ degradation. We demonstrate that promoting intracellular Aβ degradation by microglia is a common feature of HDL apolipoproteins, including apoE and apoA-I. This effect was not dependent on the direct interaction of apoE and Aβ. Regulation of Aβ degradation was achieved by solely manipulating cellular cholesterol levels. The expression and the activity of Aβ degrading enzymes, however, were not regulated by cholesterol. We observed that reducing cellular cholesterol levels by apoE resulted in faster delivery of Aβ to lysosomes and enhanced degradation. Moreover, apoE facilitated the recycling of Rab7, a small GTPase responsible for recruiting the motor complex to late endosomes/lysosomes. These data indicate that faster endocytic trafficking of Aβ-containing vesicles in the presence of apoE resulted from efficient recycling of Rab7 from lysosomes to early endosomes. Thus, apoE-induced intracellular Aβ degradation is mediated by the cholesterol efflux function of apoE, which lowers cellular cholesterol levels and subsequently facilitates the intracellular trafficking of Aβ to lysosomes for degradation. These findings demonstrate a direct role of cholesterol in the intracellular Aβ degradation.