We propose an algorithm called Sparse Manifold Clustering and Embedding (SMCE) for simultaneous clustering and dimensionality reduction of data lying in multiple nonlinear manifolds. Similar to most dimensionality reduction methods, SMCE finds a small neighborhood around each data point and connects each point to its neighbors with appropriate weights. The key difference is that SMCE finds both the neighbors and the weights automatically. This is done by solving a sparse optimization problem, which encourages selecting nearby points that lie in the same manifold and approximately span a low-dimensional affine subspace. The optimal solution encodes information that can be used for clustering and dimensionality reduction using spectral clustering and embedding. Moreover, the size of the optimal neighborhood of a data point, which can be different for different points, provides an estimate of the dimension of the manifold to which the point belongs. Experiments demonstrate that our method can effectively handle multiple manifolds that are very close to each other, manifolds with non-uniform sampling and holes, as well as estimate the intrinsic dimensions of the manifolds.