The sequence similarity with bacterial neutral sphingomyelinase resulted in the isolation of putative mammalian counterparts and, subsequently, identification of similar molecules in a number of other eukaryotic organisms. Based on sequence similarities and previous characterization of the mammalian enzymes, we have chemically modified specific residues and performed site-directed mutagenesis in order to identify critical catalytic residues and determinants for membrane localization. Modification of histidine residues and the substrate protection experiments demonstrated the presence of reactive histidine residues within the active site. Site directed mutagenesis suggested an essential role in catalysis for two histidine residues (His-136 and His-272), which are conserved in all sequences. Mutations of two additional histidines (His-138 and His-151), conserved only in eukaryotes, resulted in reduced neutral sphingomyelinase activity. In addition to sphingomyelin, the enzyme also hydrolyzed lysophosphatidylcholine. Exposure to an oxidizing environment or modification of cysteine residues using several specific compounds also inactivated the enzyme. Site-directed mutagenesis of eight cysteine residues and gel-shift analysis demonstrated that these residues did not participate in the catalytic reaction and suggested the involvement of cysteines in the formation/breakage of disulfide bonds, which could underlie the reversible inactivation by the oxidizing compounds. Cellular localization studies of a series of deletion mutants, expressed as green fluorescent protein fusion proteins, demonstrated that the transmembrane region contains determinants for the endoplasmic reticulum localization.