The alpha7 nicotinic acetylcholine receptor (nAChR) plays a key role in neural development and neurodegeneration. Here, we identify a novel, modulatory receptor ligand, a 14-amino acid peptide (AEFHRWSSYMVHWK) derived from the C-terminus of acetylcholinesterase (AChE). In three different in vitro preparations, this 'AChE-peptide' is bioactive in a ligand-specific and concentration-dependent manner. First, it modulates acutely the effect of acetylcholine (ACh) on Xenopus oocytes transfected with human alpha7, but not alpha4/beta2, nAChR. The action persists when intracellular calcium is chelated with BAPTA or when calcium is substituted with barium ions. This observation suggests that intracellular Ca(2+) signals do not mediate the interaction between the peptide and nAChR, but rather that the interaction is direct: however, the intervention of other mediators cannot be excluded. Secondly, in recordings from the CA1 region in guinea-pig hippocampal slices, AChE-peptide modulates synaptic plasticity in a alpha-bungarotoxin (alpha-BgTx)-sensitive manner. Thirdly, in organotypic cultures of rat hippocampus, long-term exposure to peptide attenuates neurite outgrowth: this chronic, functional effect is selectively blocked by the alpha7 nAChR antagonists, alpha-BgTx and methyllycaconitine, but not by the alpha4/beta2-preferring blocker dihydro-beta-ethroidine. A scrambled peptide variant, and the analogous peptide from butyrylcholinesterase, are ineffective in all three paradigms. The consequences of this novel modulation of the alpha7 nAChR may be activation of a trophic-toxic axis, of relevance to neurodegeneration.