The pathogenesis of Alzheimer disease appears to be strongly linked to the aggregation of amyloid-β (Aβ) peptide and, especially, formation of soluble Aβ1-42 oligomers. It was recently demonstrated that the cellular prion protein, PrP(C), binds with high affinity to these oligomers, acting as a putative receptor that mediates at least some of their neurotoxic effects. Here we show that the soluble (i.e. glycophosphatidylinositol anchor-free) prion protein and its N-terminal fragment have a strong effect on the aggregation pathway of Aβ1-42, inhibiting its assembly into amyloid fibrils. Furthermore, the prion protein prevents formation of spherical oligomers that normally occur during Aβ fibrillogenesis, acting as a potent inhibitor of Aβ1-42 toxicity as assessed in experiments with neuronal cell culture. These findings may provide a molecular level foundation to explain the reported protective action of the physiologically released N-terminal N1 fragment of PrP(C) against Aβ neurotoxicity. They also suggest a novel approach to pharmacological intervention in Alzheimer disease.