PrPC, the cellular isoform of the prion protein, serves to transduce the neurotoxic effects of PrPSc, the infectious isoform, but how this occurs is mysterious. Here, using a combination of electrophysiological, cellular, and biophysical techniques, we show that the flexible, N-terminal domain of PrPC functions as a powerful toxicity-transducing effector whose activity is tightly regulated in cis by the globular C-terminal domain. Ligands binding to the N-terminal domain abolish the spontaneous ionic currents associated with neurotoxic mutants of PrP, and the isolated N-terminal domain induces currents when expressed in the absence of the C-terminal domain. Anti-PrP antibodies targeting epitopes in the C-terminal domain induce currents, and cause degeneration of dendrites on murine hippocampal neurons, effects that entirely dependent on the effector function of the N-terminus. NMR experiments demonstrate intramolecular docking between N- and C-terminal domains of PrPC, revealing a novel auto-inhibitory mechanism that regulates the functional activity of PrPC. DOI: http://dx.doi.org/10.7554/eLife.23473.001, eLife digest Prion diseases are a group of degenerative illnesses of the brain caused when a molecule called the prion protein (PrP for short) adopts the wrong shape. These diseases include the human form of mad cow disease, and are often fatal with no effective treatments or cures. Though the normal activity of PrP is not certain, abnormal PrP can affect the healthy PrP on the surface of brain cells and lead to disease. Similar mechanisms may also contribute to other life-threatening brain disorders, including Alzheimer’s disease and Parkinson’s disease. It had been shown that certain altered PrP proteins caused the death of brain cells by allowing excessive electrical charges to cross the membranes of the cell. These changes led to symptoms in animal models of the diseases. Experiments showed that adding a large amount of normal PrP to the cells could prevent these effects. These studies, however, had not yet resolved how PrP behaves inside cells and how this contributes to disease. Using genetically modified mice and cells grown in the laboratory, Wu et al. investigated the role of different parts of PrP in causing brain cells to degenerate. The experiments showed that one end of the protein, called the N-terminus, is involved in the movement of electrical charges across the cell membrane and is able to cause cell degeneration. By contrast, the other end of the protein, the C-terminus, acts as a regulator for the N-terminus and can prevent cell degeneration. Further investigation revealed that the C-terminus regulates the N-terminus through direct contact. A better understanding of the role of PrP in prion diseases may help to reveal new treatments for these and other degenerative brain disorders. In particular, the new findings highlight that treatments should target the toxic N-terminus of altered PrP and not the regulatory C-terminus. Further study will examine how different molecules in the brain control the interaction between the two ends of PrP in healthy brain cells and how this is altered in diseased cells. DOI: http://dx.doi.org/10.7554/eLife.23473.002