The influenza-virus M2 protein has proton channel activity required for virus uncoating and maturation of hemagglutinin (HA) through low-pH compartments. The proton channel is cytotoxic in heterologous expression systems and can be blocked with rimantadine. In an independent, rimantadine-resistant function, M2, interacting with the M1 protein, controls the shape of virus particles. These bud from cholesterol-rich membrane rafts where viral glycoproteins and matrix (M1)/RNP complexes assemble. We demonstrate that M2 preparations from influenza virus-infected cells and from a baculovirus expression system contain 0.5-0.9 molecules of cholesterol per monomer. Sequence analyses of the membrane-proximal M2 endodomain reveal interfacial hydrophobicity, a cholesterol-binding motif first identified in peripheral benzodiazepine receptor and human immunodeficiency virus gp41, and an overlapping phosphatidylinositol 4,5-bisphosphate-binding motif. M2 induced rimantadine-reversible cytotoxicity in intrinsically cholesterol-free E. coli, and purified E. coli-expressed M2 functionally reconstituted into cholesterol-free liposomes supported rimantadine-sensitive proton translocation. Therefore, cholesterol was nonessential for M2 ion-channel function and cytotoxicity and for the effect of rimantadine. Only about 5-8% of both M2 preparations, regardless of cholesterol content, associated with detergent-resistant membranes. Cholesterol affinity and palmitoylation, in combination with a short transmembrane segment suggest M2 is a peripheral raft protein. Preference for the raft/non-raft interface may determine colocalization with HA during apical transport, the low level of M2 incorporated into the viral envelope and its undisclosed role in virus budding for which a model is presented. M2 may promote clustering and merger of rafts and the pinching-off (fission) of virus particles.