In eukaryotes, sphingolipids (SLs) are important membrane components and powerful signaling molecules. In Leishmania, the major group of SLs is inositol phosphorylceramide (IPC), which is common in yeast and Trypanosomatids but absent in mammals. In contrast, sphingomyelin is not synthesized by Leishmania but is abundant in mammals. In the promastigote stage in vitro, Leishmania use SL metabolism as a major pathway to produce ethanolamine (EtN), a metabolite essential for survival and differentiation from non-virulent procyclics to highly virulent metacyclics. To further probe SL metabolism, we identified a gene encoding a putative neutral sphingomyelinase (SMase) and/or IPC hydrolase (IPCase), designated ISCL (Inositol phosphoSphingolipid phospholipase C-Like). Despite the lack of sphingomyelin synthesis, L. major promastigotes exhibited a potent SMase activity which was abolished upon deletion of ISCL, and increased following over-expression by episomal complementation. ISCL-dependent activity with sphingomyelin was about 20 fold greater than that seen with IPC. Null mutants of ISCL (iscl−) showed modest accumulation of IPC, but grew and differentiated normally in vitro. Interestingly, iscl− mutants did not induce lesion pathology in the susceptible BALB/c mice, yet persisted indefinitely at low levels at the site of infection. Notably, the acute virulence of iscl− was completely restored by the expression of ISCL or heterologous mammalian or fungal SMases, but not by fungal proteins exhibiting only IPCase activity. Together, these findings strongly suggest that degradation of host-derived sphingomyelin plays a pivotal role in the proliferation of Leishmania in mammalian hosts and the manifestation of acute disease pathology. Leishmania are obligate intracellular parasites responsible for a spectrum of diseases in humans ranging from self-healing skin lesions to deadly visceral infections. To survive, they must downregulate the microbicidal activity and scavenge nutrients from the host. Although Leishmania parasites do not synthesize sphingomyelin, which is an abundant lipid in mammals, they do possess the ability to hydrolyze sphingomyelin. This neutral sphingomyelinase (SMase) activity is dependent on an ISCL gene, which is also required for the degradation of inositol phosphorylceramide, the dominant sphingolipid in Leishmania. Deletion of ISCL in L. major led to a complete loss of SMase activity but no obvious defects in growth or differentiation in vitro. Remarkably, null mutants of ISCL failed to induce any detectable pathology in mammals yet were able to persist at low levels indefinitely. Such defect was completely reversed when a functional neutral SMase was introduced into the mutant. In total, our results suggest that degradation of host-derived sphingomyelin by Leishmania is essential for acute virulence. Further studies will elucidate the pivotal role of sphingolipid homeostasis in the molecular interaction between Leishmania parasites and their mammalian hosts.