Despite the presence of significant levels of systemic Interferon gamma (IFNγ), the host protective cytokine, Kala-azar patients display high parasite load with downregulated IFNγ signaling in Leishmania donovani (LD) infected macrophages (LD-MØs); the cause of such aberrant phenomenon is unknown. Here we reveal for the first time the mechanistic basis of impaired IFNγ signaling in parasitized murine macrophages. Our study clearly shows that in LD-MØs IFNγ receptor (IFNγR) expression and their ligand-affinity remained unaltered. The intracellular parasites did not pose any generalized defect in LD-MØs as IL-10 mediated signal transducer and activator of transcription 3 (STAT3) phosphorylation remained unaltered with respect to normal. Previously, we showed that LD-MØs are more fluid than normal MØs due to quenching of membrane cholesterol. The decreased rigidity in LD-MØs was not due to parasite derived lipophosphoglycan (LPG) because purified LPG failed to alter fluidity in normal MØs. IFNγR subunit 1 (IFNγR1) and subunit 2 (IFNγR2) colocalize in raft upon IFNγ stimulation of normal MØs, but this was absent in LD-MØs. Oddly enough, such association of IFNγR1 and IFNγR2 could be restored upon liposomal delivery of cholesterol as evident from the fluorescence resonance energy transfer (FRET) experiment and co-immunoprecipitation studies. Furthermore, liposomal cholesterol treatment together with IFNγ allowed reassociation of signaling assembly (phospho-JAK1, JAK2 and STAT1) in LD-MØs, appropriate signaling, and subsequent parasite killing. This effect was cholesterol specific because cholesterol analogue 4-cholestene-3-one failed to restore the response. The presence of cholesterol binding motifs [(L/V)-X(1-5)-Y-X(1-5)-(R/K)] in the transmembrane domain of IFNγR1 was also noted. The interaction of peptides representing this motif of IFNγR1 was studied with cholesterol-liposome and analogue-liposome with difference of two orders of magnitude in respective affinity (K(D): 4.27×10(-9) M versus 2.69×10(-7) M). These observations reinforce the importance of cholesterol in the regulation of function of IFNγR1 proteins. This study clearly demonstrates that during its intracellular life-cycle LD perturbs IFNγR1 and IFNγR2 assembly and subsequent ligand driven signaling by quenching MØ membrane cholesterol.