Amyloid beta/A4 protein precursor (APP) is secreted into medium by most cultured cells and can function as an autocrine factor. To study the biological function of secreted forms of APP (sAPP) on neurons, we used a clonal CNS neuronal line, B103, which does not synthesize detectable levels of APP. B103 cells transfected with APP construct developed neurites faster than the parent B103 cells when plated in a serum-free defined medium. Neurite outgrowth of B103 cells was promoted by the conditioned medium of APP-695-over-producing cells or by the bacteria- produced sAPP-695 (named KB75). A series of peptides having sequences between Ala-319 and Met-335 of APP-695 also stimulated neurite outgrowth of B103 cells. The sequence of five amino acids, RERMS (APP 328–332), within this stretch of sequence, was the shortest active peptide, although the concentration required for the neuritotropic activity was higher than that of KB75. Binding assay using 125I-labeled APP 17-mer peptide corresponding to Ala-319 to Met-335 of APP-695 as a ligand demonstrated specific and saturable cell-surface binding sites. The predicted KD value was 20 +/- 5 nM and the Bmax value was 80 +/- 8 fmol/10(6) cells. The binding could be displaced with KB75. A 17-mer peptide with reverse sequence neither induced neurite outgrowth nor competed for the binding. A bacteria-produced sAPP fragment lacking the active 17-mer sequence (named KB75 delta) did not compete with 125I- labeled 17-mer for binding or stimulate neurite extension. A peptide of sequence RMSQ (APP 330–333), which partially overlaps the active sequence RERMS, could block the neuritotropic effects of both KB75 and the 17-mer at higher concentrations. APP 17-mer was also found to induce the accumulation of inositol polyphosphates, suggesting that the APP 17-mer effects involve activation of inositol phospholipid signal transduction systems. These data indicate that sAPP induces neurite extension through cell-surface binding and that the domain containing the RERMS sequence (APP 328–332) represents the active site responsible for this function.