Elevated ceramide concentrations in adipocytes and skeletal muscle impair PKB (protein kinase B; also known as Akt)-directed insulin signalling to key hormonal end points. An important feature of this inhibition involves the ceramide-induced activation of atypical PKCζ (protein kinase C-ζ), which associates with and negatively regulates PKB. In the present study, we demonstrate that this inhibition is critically dependent on the targeting and subsequent retention of PKCζ–PKB within CEM (caveolin-enriched microdomains), which is facilitated by kinase interactions with caveolin. Ceramide also recruits PTEN (phosphatase and tensin homologue detected on chromosome 10), a 3′-phosphoinositide phosphatase, thereby creating a repressive membrane microenvironment from which PKB cannot signal. Disrupting the structural integrity of caveolae by cholesterol depletion prevented caveolar targeting of PKCζ and PKB and suppressed kinase–caveolin association, but, importantly, also ameliorated ceramide-induced inhibition of PKB. Consistent with this, adipocytes from caveolin-1^−/− mice, which lack functional caveolae, exhibit greater resistance to ceramide compared with caveolin-1^+/+ adipocytes. We conclude that the recruitment and retention of PKB within CEM contribute significantly to ceramide-induced inhibition of PKB-directed signalling.