The transient membrane lipid diacylglycerol (DG) is known to modify and destabilize phospholipid bilayers and can lead to the formation of nonbilayer structures. Since cholesterol forms a major fraction of many plasma membranes, we have investigated how it modifies the structural effects of DG on bilayers of egg phosphatidylcholine (PC) and egg phosphatidylethanolamine (PE). We view these systems as modelling the behaviour of local, DG-containing sites in membranes. Using X-ray diffraction, we have characterized the lamellar (L alpha) and inverse hexagonal (HII) structures that these ternary lipid mixtures form in excess aqueous solution. As the DG level increases, the lipid progresses from a single L alpha structure to a mixture of L alpha and HII, and then to a pure HII structure. This allows determination of the DG levels at which the HII transition begins, which we interpret as those levels that destabilize bilayers. In both PC and PE bilayers, the presence of 30 mol% cholesterol reduces the amounts of DG required to destabilize the bilayer structure. The destabilization can be translated into the number of neighbouring lipid molecules that a DG molecule perturbs, and of bilayer areas that it affects. The data show that the presence of cholesterol greatly enhances the perturbing effects of DG. We examine the possible role of DG in enzyme activation and membrane fusion.