The neurodegenerative disease Niemann-Pick Type C2 (NPC2) results from mutations in the NPC2 (HE1) gene that cause abnormally high cholesterol accumulation in cells. We find that purified NPC2, a secreted soluble protein, binds cholesterol specifically with a much higher affinity (K(d) = 30-50 nM) than previously reported. Genetic and biochemical studies identified single amino acid changes that prevent both cholesterol binding and the restoration of normal cholesterol levels in mutant cells. The amino acids that affect cholesterol binding surround a hydrophobic pocket in the NPC2 protein structure, identifying a candidate sterol-binding location. On the basis of evolutionary analysis and mutagenesis, three other regions of the NPC2 protein emerged as important, including one required for efficient secretion.