Alzheimer's disease (AD) is characterized by brain accumulation of the neurotoxic amyloid-β peptide (Aβ) and by loss of cholinergic neurons and nicotinic acetylcholine receptors (nAChRs). Recent evidence indicates that memory loss and cognitive decline in AD correlate better with the amount of soluble Aβ than with the extent of amyloid plaque deposits in affected brains. Inhibition of nAChRs by soluble Aβ40 is suggested to contribute to early cholinergic dysfunction in AD. Using phage display screening, we have previously identified a heptapeptide, termed IQ, homologous to most nAChR subtypes, binding with nanomolar affinity to soluble Aβ40 and blocking Aβ-induced inhibition of carbamylcholine-induced currents in PC12 cells expressing α7 nAChRs. Using alanine scanning mutagenesis and whole-cell current recording, we have now defined the amino acids in IQ essential for reversal of Aβ40 inhibition of carbamylcholine-induced responses in PC12 cells, mediated by α7 subtypes and other endogenously expressed nAChRs. We further investigated the effects of soluble Aβ, IQ and analogues of IQ on α3β4 nAChRs recombinantly expressed in HEK293 cells. Results show that nanomolar concentrations of soluble Aβ40 potently inhibit the function of α3β4 nAChRs, and that subsequent addition of IQ or its analogues does not reverse this effect. However, co-application of IQ makes the inhibition of α3β4 nAChRs by Aβ40 reversible. These findings indicate that Aβ40 inhibits different subtypes of nAChRs by interacting with specific receptor domains homologous to the IQ peptide, suggesting that IQ may be a lead for novel drugs to block the inhibition of cholinergic function in AD.