The amyloid protein precursor (APP) of Alzheimer's disease is synthesized as an integral transmembrane protein that is released from cells in culture following proteolytic cleavage. The function of released APP is not known, although there is evidence that the protein may bind to components of the extracellular matrix (ECM). In the present study, substratum-bound APP stimulated neurite outgrowth in cultures of chick sympathetic and mouse hippocampal neurons. This effect was dependent upon the presence of substratum-bound heparan sulfate proteoglycans (HSPG). The effect of APP on neurite outgrowth was comparable to that of laminin. A 14 K N-terminal fragment of APP was found to bind heparin and a region close to the N-terminus of APP (residues 96–110) identified as a potential heparin-binding domain based on secondary structure predictions and molecular modeling. Mutagenesis of three basic residues (lysine-99, arginine-100, and arginine-102) resulted in a recombinant protein (APPhep) with decreased heparin-binding capacity. A peptide homologous to the heparin-binding domain was synthesized and found to bind strongly to heparin and to inhibit binding of 125I-labeled APP to heparin (IC50 approximately 10(- 7) M). The peptide blocked the effect of APP on neurite outgrowth (IC50 approximately 10(-7) M), whereas two other peptides homologous to other domains in APP had no effect. The results indicate that the binding of APP to HSPG in the ECM may stimulate the effects of APP on neurite outgrowth.