Ceramide is generated in response to numerous stress-inducing stimuli and has been implicated in the regulation of diverse cellular responses, including cell death, differentiation, and insulin sensitivity. Recent evidence indicates that ceramide may regulate these responses by inhibiting the stimulus-mediated activation of protein kinase B (PKB), a key determinant of cell fate and insulin action. Here we show that inhibition of this kinase involves atypical PKC, which physically interacts with PKB in unstimulated cells. Insulin reduces the PKB-PKC interaction and stimulates PKB. However, dissociation of the kinase complex and the attendant hormonal activation of PKB were prevented by ceramide. Under these circumstances, ceramide activated PKC, leading to phosphorylation of the PKB-PH domain on Thr34. This phosphorylation inhibited phosphatidylinositol 3,4,5-trisphosphate (PIP3) binding to PKB, thereby preventing activation of the kinase by insulin. In contrast, a PKB-PH domain with a T34A mutation retained the ability to bind PIP3 even in the presence of a ceramide-activated PKC and, as such, expression of PKB T34A mutant in L6 cells was resistant to inhibition by ceramide treatment. Inhibitors of PKC and a kinase-dead PKC both antagonized the inhibitory effect of ceramide on PKB. Since PKB confers a prosurvival signal and regulates numerous pathways in response to insulin, suppressing its activation by a PKC-dependent process may be one mechanism by which ceramide promotes cell death and induces insulin resistance.