There is much evidence to indicate that cholesterol forms lateral membrane microdomains (rafts), and to suggest their important role in cellular signaling. However, no probe has been produced to analyze cholesterol behavior, especially cholesterol movement in rafts, in real time. To obtain a potent tool for analyzing cholesterol dynamics in rafts, we prepared and characterized several truncated fragments of θ‐toxin (perfringolysin O), a cholesterol‐binding cytolysin, whose chemically modified form has been recently shown to bind selectively to rafts. BIAcore and structural analyses demonstrate that the C‐terminal domain (domain 4) of the toxin is the smallest functional unit that has the same cholesterol‐binding activity as the full‐size toxin with structural stability. Cell membrane‐bound recombinant domain 4 was detected in the floating low‐density fractions and was found to be cofractionated with the raft‐associated protein Lck, indicating that recombinant domain 4 also binds selectively to cholesterol‐rich rafts. Furthermore, an enhanced green fluorescent protein‐domain 4 fusion protein stains membrane surfaces in a cholesterol‐dependent manner in living cells. Therefore, domain 4 of θ‐toxin is an essential cholesterol‐binding unit targeting to cholesterol in membrane rafts, providing a very useful tool for further studies on lipid rafts on cell surfaces and inside cells.