Prosaposin, recently identified as a neurotrophic factor (1), is the precursor of saposins A, B, C, and D. The neurotrophic activity of prosaposin resides in the saposin C domain. We have pinpointed the active sequence to a linear 12-mer located in the NH2-terminal sequence of saposin C (LIDNNKTEKEIL). Nanomolar concentrations of a 22-mer peptide encompassing this region stimulated neurite outgrowth and choline acetyltransferase activity, and prevented cell death in neuroblastoma cells. In primary cerebellar granule cells, the 22-mer also stimulated neurite outgroth. Studies of the neuroblastoma line NS20Y using a radiolabeled 18-mer from the neurotrophic region identified a high-affinity (Kd = 70 pM) binding site indicative of receptor-ligand interaction. The 22-mer stimulated protein phosphorylation of several proteins, some of which were tyrosine-phosphorylated after brief exposure similar to saposin C. Circular dichroism studies demonstrated that the 22-mer was converted from a random to a helical structure by addition of ganglioside GM1. The results are consistent with receptor-ligand binding by the peptide initiating a signal transduction cascade and resulting in neuronal differentiation.