Proteolytic processing of amyloid precursor protein (APP) through an endosomal/lysosomal pathway generates carboxy-terminal polypeptides that contain an intact beta-amyloid domain. Cleavage by as-yet unidentified proteases releases the beta-amyloid peptide in soluble form. In Alzheimer's disease, aggregated beta-amyloid is deposited in extracellular neuritic plaques. Although most of the molecular mechanisms involving beta-amyloid and APP in the aetiology of Alzheimer's disease are still unclear, changes in APP metabolism may be important in the pathogenesis of the disease. Here we show that transgenic mice expressing the amyloidogenic carboxy-terminal 104 amino acids of APP develop, with ageing, extracellular beta-amyloid immunoreactivity, increased gliosis and microglial reactivity, as well as cell loss in the CA1 region of the hippocampus. Adult transgenic mice demonstrate spatial-learning deficits in the Morris water maze and in maintenance of long-term potentiation (LTP). Our results indicate that alterations in the processing of APP may have considerable physiological effects on synaptic plasticity.