The behaviors of two chemically well-defined sphingolipids, N-palmitoyl-sphingomyelin (C16:0-SM) and the corresponding ceramide (C16:0-Cer), in a 1-palmitoyl-2-oleoyl-sn-glycero-3-phosphatidylcholine (POPC) matrix were compared. Minor attenuation of lateral diffusion upon increasing the mole fraction of C16:0-SM (X_SM, up to 0.25) was indicated by the slight decrement in the excimer/monomer intensity ratio (I_e/I_m) for a trace amount (mole fraction X = 0.01) of a pyrene-labeled ceramide analogue (N-[(pyren)-1-yl]decanoyl-sphingosine, PDCer) in keeping with the miscibility of C16:0-SM in POPC. Increasing membrane order was revealed by the augmented polarization P for diphenylhexatriene (DPH). In contrast, when C16:0-Cer was substituted for C16:0-SM an approximately 1.6-fold increase in I_e/I_m for PDCer was evident upon increasing X_cer, with parallel increment in DPH polarization. In agreement with our recent data on natural ceramides in dimyristoylphosphatidylcholine (DMPC) bilayers [Holopainen et al. (1997) Chem. Phys. Lipids 88, 1−13], we conclude that C16:0-Cer becomes enriched into microdomains in the fluid POPC membrane. Interestingly, enhanced formation of microdomains by ceramide was observed when the total sphingolipid content in tertiary alloys with POPC was maintained constant (X_cer + X_SM = 0.25) and the SM/Cer stoichiometry was varied. Finally, when ceramide was generated enzymatically in POPC/C16:0-SM (3:1, molar fraction) LUVs by sphingomyelinase (SMase, Bacillus cereus), maximally approximately 85% of hydrolysis of sphingomyelin was measured within <3 min at 30 °C. The formation of ceramide was accompanied by a closely parallel increase in DPH polarization. There was also an increase in I_e/I_m for PDCer; however, these changes in I_e/I_m were significantly slower, requiring ≈105 min to reach a steady state. These data show that the rapid enzymatic formation of ceramide under these conditions is followed by much slower reorganization process, resulting in the formation of microdomains enriched in this lipid.