A large body of evidence has implicated Abeta peptides and other derivatives of the amyloid precursor protein (APP) as central to the pathogenesis of Alzheimer's disease (AD). However, the functional relationship of APP and its proteolytic derivatives to neuronal electrophysiology is not known. Here, we show that neuronal activity modulates the formation and secretion of Abeta peptides in hippocampal slice neurons that overexpress APP. In turn, Abeta selectively depresses excitatory synaptic transmission onto neurons that overexpress APP, as well as nearby neurons that do not. This depression depends on NMDA-R activity and can be reversed by blockade of neuronal activity. Synaptic depression from excessive Abeta could contribute to cognitive decline during early AD. In addition, we propose that activity-dependent modulation of endogenous Abeta production may normally participate in a negative feedback that could keep neuronal hyperactivity in check. Disruption of this feedback system could contribute to disease progression in AD.