Amyloid beta peptide (Aβ) has a key role in the pathological process of Alzheimer's disease (AD), but the physiological function of Aβ and of the amyloid precursor protein (APP) is unknown1,2. Recently, it was shown that APP processing is sensitive to cholesterol and other lipids3-10. Hydroxymethylglutaryl-CoA reductase (HMGR) and sphingomyelinases (SMases) are the main enzymes that regulate cholesterol biosynthesis and sphingomyelin (SM) levels, respectively. We show that control of cholesterol and SM metabolism involves APP processing. Aβ42 directly activates neutral SMase and downregulates SM levels, whereas Aβ40 reduces cholesterol de novo synthesis by inhibition of HMGR activity. This process strictly depends on γ-secretase activity. In line with altered Aβ40/42 generation, pathological presenilin mutations result in increased cholesterol and decreased SM levels. Our results demonstrate a biological function for APP processing and also a functional basis for the link that has been observed between lipids and Alzheimer's disease (AD).