In this study, we have examined how the headgroup size and properties affect the membrane properties of sphingomyelin and interactions with cholesterol. We prepared N-palmitoyl ceramide phosphoethanolamine (PCPE) and compared its membrane behavior with D-erythro-N-palmitoyl-sphingomyelin (PSM), both in monolayers and bilayers. The pure PCPE monolayer did not show a phase transition at 22 degrees C (in contrast to PSM), but displayed a much higher inverse isothermal compressibility as compared to the PSM monolayer, indicating stronger intermolecular interactions between PCPEs than between PSMs. At 37 degrees C the PCPE monolayer was more expanded (than at 22 degrees C) and displayed a rather poorly defined phase transition. When cholesterol was comixed into the monolayer, a condensing effect of cholesterol on the lateral packing of the lipids in the monolayer could be observed. The phase transition from an ordered to a disordered state in bilayer membranes was determined by diphenylhexatriene steady-state anisotropy. Whereas the PSM bilayer became disordered at 41 degrees C, the PCPE bilayer main transition occurred around 64 degrees C. The diphenylhexatriene steady-state anisotropy values were similar in both PCPE and PSM bilayers before and after the phase transition, suggesting that the order in the hydrophobic core in both bilayer types was rather similar. The emission from Laurdan was blue shifted in PCPE bilayers in the gel phase when compared to the emission spectra from PSM bilayers, and the blue-shifted component in PCPE bilayers was retained also after the phase transition, suggesting that Laurdan molecules sensed a more hydrophobic environment at the PCPE interface compared to the PSM interface both below and above the bilayer melting temperature. Whereas PSM was able to form sterol-enriched domains in dominantly fluid bilayers (as determined from cholestatrienol dequenching experiments), PCPE failed to form such domains, suggesting that the size and/or properties of the headgroup was important for stabilizing sphingolipid/sterol interaction. In conclusion, our study has highlighted how the headgroup in sphingomyelin affect its membrane properties and interactions with cholesterol.