Niemann--Pick C disease is an inherited disorder in which cholesterol and other lipids accumulate in the late endosomal/lysosomal compartment. Recently, cyclodextrins (CD) have been shown to reduce symptoms and extend lifespan in animal models of the disease. In the present studies we examined the mechanism of sterol transport by CD using in vitro model systems and fluorescence spectroscopy and NPC2-deficient fibroblasts. We demonstrate that cholesterol transport from the lysosomal cholesterol-binding protein NPC2 to CD occurs via aqueous diffusional transfer and is very slow; the rate-limiting step appears to be dissociation of cholesterol from NPC2, suggesting that specific interactions between NPC2 and CD do not occur. In contrast, the transfer rate of the fluorescent cholesterol analogue dehydroergosterol (DHE) from CD to phospholipid membranes is very rapid and is directly proportional to the acceptor membrane concentration, as is DHE transfer from membranes to CD. Moreover, CD dramatically increases the rate of sterol transfer between membranes, with rates that can approach those mediated by NPC2. The results suggest that sterol transfer from CD to membranes occurs by a collisional transfer mechanism involving direct interaction of CD with membranes, similar to that shown previously for NPC2. For CD, however, absolute rates are slower compared to NPC2 for a given concentration, and the lysosomal phospholipid lysobisphosphatidic acid (LBPA) does not stimulate rates of sterol transfer between membranes and CD. As expected from the apparent absence of interaction between CD and NPC2, the addition of CD to NPC2-deficient fibroblasts rapidly rescued the cholesterol accumulation phenotype. Thus, the recent observations of CD efficacy in mouse models of NPC disease are likely the result of CD enhancement of cholesterol transport between membranes, with rapid sterol transfer occurring during CD--membrane interactions.