Lipids influence the ability of Cys-loop receptors to gate open in response to neurotransmitter binding, but the underlying mechanisms are poorly understood. With the nicotinic acetylcholine receptor (nAChR) from Torpedo, current models suggest that lipids modulate the natural equilibrium between resting and desensitized conformations. We show that the lipid-inactivated nAChR is not desensitized, instead it adopts a novel conformation where the allosteric coupling between its neurotransmitter-binding sites and transmembrane pore is lost. The uncoupling is accompanied by an unmasking of previously buried residues, suggesting weakened association between structurally intact agonist-binding and transmembrane domains. These data combined with the extensive literature on Cys-loop receptor-lipid interactions suggest that the M4 transmembrane helix plays a key role as a lipid-sensor, translating bilayer properties into altered nAChR function.