Ceramide produced by the hydrolysis of sphingomyelin is an important cellular intermediate in hormone action. Here, we present evidence that interleukin 1 beta (IL-1 beta) binding to normal human fibroblasts initiates a lipid messenger cascade that takes place in a sphingomyelin-rich plasma membrane domain with the characteristics of caveolae. Hormone binding first stimulated the appearance of diacylglycerol (DAG) in a caveolea-rich membrane fraction isolated from whole cells, This was immediately followed by the loss of a resident population of sphingomyelin from the fraction and the concomitant appearance of ceramide. The ceramide produced in response to IL-1 beta blocked platelet-derived growth factor-stimulated DNA synthesis, IL-1 beta stimulated the appearance of DAG in other fractions from the same cell, but this DAG was not coupled to ceramide production. This indicates that ceramide production is highly compartmentalized at the cell surface. Since caveolae are known to be involved in membrane internalization, they may be essential for the delivery of ceramide to a site of action within the cell.