The cellular prion protein (PrPC) undergoes constitutive proteolytic cleavage between residues 111/112 to yield a soluble N-terminal fragment (N1) and a membrane-anchored C-terminal fragment (C1). The C1 fragment represents the major proteolytic fragment of PrPC in brain and several cell types. To explore the role of C1 in prion disease, we generated Tg(C1) transgenic mice expressing this fragment (PrP(Δ23-111)) in the presence and absence of endogenous PrP. In contrast to several other N-terminally deleted forms of PrP, the C1 fragment does not cause a spontaneous neurological disease in the absence of endogenous PrP. Tg(C1) mice inoculated with scrapie prions remain healthy and do not accumulate protease-resistant PrP, demonstrating that C1 is not a substrate for conversion to PrPSc (the disease-associated isoform). Interestingly, Tg(C1) mice co-expressing C1 along with wild-type PrP (either endogenous or encoded by a second transgene) become ill after scrapie inoculation, but with a dramatically delayed time course compared with mice lacking C1. In addition, accumulation of PrPSc was markedly slowed in these animals. Similar effects were produced by a shorter C-terminal fragment of PrP(Δ23-134). These results demonstrate that C1 acts as dominant-negative inhibitor of PrPSc formation and accumulation of neurotoxic forms of PrP. Thus, C1, a naturally occurring fragment of PrPC, might play a modulatory role during the course of prion diseases. In addition, enhancing production of C1, or exogenously administering this fragment, represents a potential therapeutic strategy for the treatment of prion diseases.