The plasma membrane pits known as caveolae have been implicated both in cholesterol homeostasis and in signal transduction. CavDGV and CavKSY, two dominant-negative amino-terminal truncation mutants of caveolin, the major structural protein of caveolae, significantly inhibited caveola-mediated SV40 infection, and were assayed for effects on Ras function. We find that CavDGV completely blocked Raf activation mediated by H-Ras, but not that mediated by K-Ras. Strikingly, the inhibitory effect of CavDGV on H-Ras signalling was completely reversed by replenishing cell membranes with cholesterol and was mimicked by cyclodextrin treatment, which depletes membrane cholesterol. These results provide a crucial link between the cholesterol-trafficking role of caveolin and its postulated role in signal transduction through cholesterol-rich surface domains. They also provide direct evidence that H-Ras and K-Ras, which are targeted to the plasma membrane by different carboxy-terminal anchors, operate in functionally distinct microdomains of the plasma membrane.