Sterol regulatory element-binding protein 1 (SREBP-1), a member of the basic-helix-loop-helix-leucine zipper (bHLH-ZIP) family of transcription factors, is synthesized as a 125 kd precursor that is attached to the nuclear envelope and endoplasmic reticulum. In sterol-depleted cells, the membrane-bound precursor is cleaved to generate a soluble NH2-terminal fragment (apparent molecular mass, 68 kd) that translocates to the nucleus. This fragment, which includes the bHLH-ZIP domain, activates transcription of the genes for the LDL receptor and HMG CoA synthase. Sterols inhibit the cleavage of SREBP-1, and the 68 kd nuclear form is rapidly catabolized, thereby reducing transcription. ALLN, an inhibitor of neutral cysteine proteases, blocks the breakdown of the 68 kd form and superinduces sterol-regulated genes. Sterol-regulated proteolysis of a membrane-bound transcription factor provides a novel mechanism by which transcription can be regulated by membrane lipids.