In tumour cell lines that display multidrug resistance, expression of P-glycoprotein (P-gp) alters many aspects of biomembrane organization in addition to its well-characterized drug transport activity. We have developed a reconstitution system to directly investigate the effect of purified P-gp on the biophysical properties of lipid bilayers. Using a mixed detergent system it was possible to efficiently reconstitute P-gp at lipid:protein ratios as low as 2.5 (w/w) by removal of detergent using adsorption to SM-2 BioBeads. P-gp was able to alter many biophysical parameters associated with lipid organization within bilayers. For example, the changes in overall fluidity and excimer formation by lipid analogues indicate modified packing organization of bilayer constituents. Surprisingly, given its role in conferring drug resistance, P-gp insertion into bilayers also caused significantly increased permeability to aqueous compounds, also reflecting a modified phospholipid environment. Translocation of various phospholipid species between leaflets of the bilayer was increased in the presence of P-gp; however, the effect was not dependent on ATP hydrolysis by the protein. Physiological concentrations of cholesterol modified P-gp function and the degree to which it perturbed bilayer organization. The basal ATPase activity of P-gp was increased in a dose-dependent fashion by the incorporation of cholesterol in PC:PE liposomes. In addition, the degree to which the modulator verapamil was able to stimulate this basal ATPase activity was reduced by the presence of cholesterol in proteoliposomes. However, the potency of verapamil was unaltered, suggesting a specific effect, not simply caused by lower drug penetration into the cholesterol containing bilayers. In summary, P-gp is able to cause perturbation in the organization of bilayer constituents. Cholesterol imparted "stability" to this perturbation of bilayer organization by P-gp and moreover this led to altered protein function.