We examined the role of cholesterol in altering the activity of the microsomal cytochrome P-450 enzyme, cholesterol-NADPH:oxygen oxidoreductase (cholesterol 7 alpha-hydroxylase). Liposomes were used to deliver cholesterol to hepatic microsomes. Formation of 7 alpha-hydroxycholesterol was quantitated by isotope dilution/gas chromatography-mass spectrometry. As the liposomal cholesterol/phospholipid molar ratio increased, 7 alpha-hydroxylase activity increased, whereas the activity of another microsomal cytochrome P-450 enzyme, ethylmorphine N-demethylase, decreased. To determine if the degree of stimulation was affected by the endogenous activity (without liposomes), microsomes, from rats fed chow alone or chow containing cholestyramine, taurocholate, or cholesterol were challenged with cholesterol-enriched liposomes. The degree of stimulation was dependent upon the endogenous activity: cholestyramine-fed much greater than cholesterol = chow control greater than taurocholate-fed. To determine if cholesterol stimulates 7 alpha-hydroxylase by increasing membrane viscosity, microsomes were incubated with liposomes having the same cholesterol/phospholipid molar ratio as microsomes, but different viscosities. Dipalmitoylphosphatidylcholine (high viscosity) liposomes increased microsomal viscosity and decreased 7 alpha-hydroxylase activity. In contrast, dioleoylphosphatidylcholine (low viscosity) liposomes decreased microsomal viscosity and increased enzyme activity. Since greater viscosity inhibits 7 alpha-hydroxylase, cholesterol cannot stimulate the enzyme by increasing membrane viscosity. The data suggest that cholesterol stimulates production of 7 alpha-hydroxycholesterol by providing substrate.