Prion diseases encompass a diverse group of neurodegenerative conditions characterized by the accumulation of misfolded prion protein (PrP) isoforms. Other conformational variants of PrP have also been proposed to contribute to neurotoxicity in prion diseases, including misfolded intermediates as well as cytosolic and transmembrane isoforms. To better understand PrP neurotoxicity, we analyzed the role of two highly conserved methionines in helix 3 on PrP biogenesis, folding and pathogenesis. Expression of the PrP-M205S and -M205,212S mutants in Drosophila led to hyperglycosylation, intracellular accumulation and widespread conformational changes due to failure of oxidative folding. Surprisingly, PrP-M205S and -M205,212S acquired a transmembrane topology (Ctm) previously linked to mutations in the signal peptide (SP) and the transmembrane domain (TMD). PrP-M205,212S also disrupted the accumulation of key neurodevelopmental proteins in lipid rafts, resulting in shortened axonal projections. These results uncover a new role for the hydrophobic domain in promoting oxidative folding and preventing the formation of neurotoxic Ctm PrP, mechanisms that may be relevant in the pathogenesis of both inherited and sporadic prion diseases.