Globoid cell leukodystrophy (Krabbe disease) is a rare infantile neurodegenerative disorder. Krabbe disease is caused by deficiency in the lysosomal enzyme galactocerebrosidase (GALC) resulting in accumulation, in the micromolar range, of the toxic metabolite galactosylsphingosine (psychosine) in the brain. Here we find that psychosine induces human astrocyte cell death probably via an apoptotic process in a concentration- and time-dependent manner (EC50 ∼ 15 μM at 4 h). We show these effects of psychosine are attenuated by pre-treatment with the sphingosine 1-phosphate receptor agonist pFTY720 (fingolimod) (IC50 ∼ 100 nM). Psychosine (1 μM, 10 μM) also enhances LPS-induced (EC50 ∼ 100 ng/ml) production of pro-inflammatory cytokines in mouse astrocytes, which is also attenuated by pFTY720 (1 μM). Most notably, for the first time, we show that psychosine, at a concentration found in the brains of patients with Krabbe disease (EC50 ∼ 100 nM), directly induces demyelination in mouse organotypic cerebellar slices in a manner that is independent of pro-inflammatory cytokine response and that pFTY720 (0.1 nM) significantly inhibits. These results support the idea that psychosine is a pathogenic agent in Krabbe disease and suggest that sphingosine 1-phosphate signalling could be a potential drug target for this disorder.