Time-dependent density functional theory has been used to calculate the static and frequency-dependent dielectric function epsilon(omega) of nonmetallic crystals. We show that a real-space description becomes feasible for crystals by using a combination of a lattice-periodic (microscopic) scalar potential with a uniform (macroscopic) electric field as perturbation in a periodic structure calculation. The induced density and microscopic potential can be obtained self-consistently for fixed macroscopic field by using linear response theory in which Coulomb interactions and exchange-correlation effects are included. We use an iterative scheme, in which density and potential are updated in every cycle. The explicit evaluation of Kohn-Sham response kernels is avoided and their singular behavior as function of the frequency is treated analytically. Coulomb integrals are evaluated efficiently using auxiliary fitfunctions and we apply a screening technique for the lattice sums. The dielectric function can then be obtained from the induced current. We obtained epsilon(omega) for C, Si, and GaAs within the adiabatic local density approximation in good agreement with experiment. In particular in the low-frequency range no adjustment of the local density approximation (LDA) band gap seems to be necessary. (C) 2000 American Institute of Physics. [S0021-9606(00)31215-6].