Egress of lipoprotein-derived cholesterol from lysosomes requires two lysosomal proteins, polytopic membrane-bound Niemann-Pick C1 (NPC1) and soluble Niemann-Pick C2 (NPC2). The reason for this dual requirement is unknown. Previously, we showed that the soluble luminal N-terminal domain (NTD) of NPC1 (amino acids 25-264) binds cholesterol. This NTD is designated NPC1(NTD). We and others showed that soluble NPC2 also binds cholesterol. Here, we establish an in vitro assay to measure transfer of [(3)H]cholesterol between these two proteins and phosphatidylcholine liposomes. Whereas NPC2 rapidly donates or accepts cholesterol from liposomes, NPC1(NTD) acts much more slowly. Bidirectional transfer of cholesterol between NPC1(NTD) and liposomes is accelerated >100-fold by NPC2. A naturally occurring human mutant of NPC2 (Pro120Ser) fails to bind cholesterol and fails to stimulate cholesterol transfer from NPC1(NTD) to liposomes. NPC2 may be essential to deliver or remove cholesterol from NPC1, an interaction that links both proteins to the cholesterol egress process from lysosomes. These findings may explain how mutations in either protein can produce a similar clinical phenotype.