The apoE gene has been identified as a major susceptibility locus for late-onset Alzheimer's disease (LOAD). The epsilon4 allele greatly reduces age of onset of LOAD as compared to the wild-type 3 allele. The molecular mechanism(s) underlying the association has not yet been fully elucidated. The apoE protein has been shown to physically interact with the Abeta region of the Amyloid Precursor Protein (APP), but also with the ectodomain of the APP holoprotein itself. In this study we have used apoE fusion proteins containing either the ER retention sequence KDEL or trans-Golgi network (TGN) signal sequence in order to define potential apoE-mediated alterations in APP protein processing. Co-expression and pulse-chase experiments showed that a functional apoE:APP interaction occurs intracellularly which directly affects maturation and subsequently the secretion kinetics of APP. In addition, an epsilon4 allele-specific induction of Abeta production has been demonstrated. apoE3 resulted in increased Abeta production only when targeted to the ER, as observed in cells transfected with an apoE3KDEL fusion protein as well as following treatment with brefeldin A. The findings suggest that in cells that express both apoE and APP, such as astrocytes and microglia, a functional apoE:APP interaction may occur which modulates APP processing and Abeta production.