Mutations in the Niemann-Pick disease genes cause lysosomal cholesterol accumulation and impaired low density lipoprotein (LDL) cholesterol esterification. These findings have been attributed to a block in cholesterol movement from lysosomes to the site of the sterol regulatory machinery. In this study we show that Niemann-Pick type C1 (NPC1) and Niemann-Pick type C2 (NPC2) mutants have increased cellular cholesterol, yet they are unable to suppress LDL receptor activity and cholesterol biosynthesis. Cholesterol overload in both NPC1 and NPC2 mutants results from the failure of LDL cholesterol tobothsuppresssterolregulatoryelement-bindingprotein-dependent gene expression and promote liver X receptor-mediated responses. However, the severity of the defect in regulation of sterol homeostasis does not correlate with endoplasmic reticulum cholesterol levels, but rather with the degree to which NPC mutant fibroblasts fail to appropriately generate 25-hydroxycholesterol and 27-hydroxycholesterol in response to LDL cholesterol. Moreover, we demonstrate that treatment with oxysterols reduces cholesterol in NPC mutants and is able to correct the NPC1I1061T phenotype, the most prevalent NPC1 disease genotype. Our findings support a role for NPC1 and NPC2 in the regulation of sterol homeostasis through generation of LDL cholesterol-derived oxysterols and have important implications for the treatment of NPC disease.