The function of the β-amyloid precursor protein (APP) of Alzheimer's disease is poorly understood. The secreted ectodomain fragment of APP (sAPPα) can be readily cleaved to produce a small N-terminal fragment (N-APP) that contains heparin-binding and metal-binding domains and that has been found to have biological activity. In the present study, we examined whether N-APP can bind to lipids. We found that N-APP binds selectively to phosphoinositides (PIPs) but poorly to most other lipids. Phosphatidylinositol 4,5-bisphosphate (PI(4,5)P2 )-rich microdomains were identified on the extracellular surface of neurons and glia in primary hippocampal cultures. N-APP bound to neurons and colocalized with PIPs on the cell surface. Furthermore, the binding of N-APP to neurons increased the level of cell-surface PI(4,5)P2 and phosphatidylinositol 3,4,5-trisphosphate. However, PIPs were not the principal cell-surface binding site for N-APP, because N-APP binding to neurons was not inhibited by a short-acyl-chain PIP analogue, and N-APP did not bind to glial cells which also possessed PI(4,5)P2 on the cell surface. The data are explained by a model in which N-APP binds to two distinct components on neurons, one of which is an unidentified receptor and the second of which is a PIP lipid, which binds more weakly to a distinct site within N-APP. Our data provide further support for the idea that N-APP may be an important mediator of APP's biological activity.