The xbp-1 mRNA encodes the XBP-1 transcription factor, a critical part of the unfolded protein response. Here we report that an RNA fragment produced from xbp-1 mRNA cleavage is a biologically active non-coding RNA (ncRNA) in Caenorhabditis elegans neurons, providing the first example of ncRNA derived from mRNA cleavage. We show that the xbp-1 ncRNA is crucial for axon regeneration in vivo, and that it acts independently of the proteincoding function of the xbp-1 transcript. Structural analysis indicates that the function of the xbp-1 ncRNA depends on a single RNA stem; and this stem forms only in the cleaved xbp-1 ncRNA fragment. Disruption of this stem abolishes the non-coding but not coding function of the endogenous xbp-1 transcript. Thus, cleavage of the xbp-1 mRNA bifurcates it into a coding and a non-coding pathway; modulation of the two pathways may allow neurons to fine-tune their response to injury and other stresses.