In C. elegans, the highly conserved DAF-2/insulin/insulin-like growth factor 1 receptor signaling (IIS) pathway regulates longevity, metabolism, reproduction and development. In mammals, acid sphingomyelinase (ASM) is an enzyme that hydrolyzes sphingomyelin to produce ceramide. ASM has been implicated in CD95 death receptor signaling under certain stress conditions. However, the involvement of ASM in growth factor receptor signaling under physiological conditions is not known. Here, we report that in vivo ASM functions as a positive regulator of the DAF-2/IIS pathway in C. elegans. We have shown that inactivation of asm-3 extends animal lifespan and promotes dauer arrest, an alternative developmental process. A significant cooperative effect on lifespan is observed between asm-3 deficiency and loss-of-function alleles of the age-1/PI 3-kinase, with the asm-3; age-1 double mutant animals having a mean lifespan 259% greater than that of the wild-type animals. The lifespan extension phenotypes caused by the loss of asm-3 are dependent on the functions of daf-16/FOXO and daf-18/PTEN. We have demonstrated that inactivation of asm-3 causes nuclear translocation of DAF-16::GFP protein, up-regulates endogenous DAF-16 protein levels and activates the downstream targeting genes of DAF-16. Together, our findings reveal a novel role of asm-3 in regulation of lifespan and diapause by modulating IIS pathway. Importantly, we have found that two drugs known to inhibit mammalian ASM activities, desipramine and clomipramine, markedly extend the lifespan of wild-type animals, in a manner similar to that achieved by genetic inactivation of the asm genes. Our studies illustrate a novel strategy of anti-aging by targeting ASM, which may potentially be extended to mammals.