The pathways leading from aberrant Prion protein (PrP) metabolism to neurodegeneration are poorly understood. Some familial PrP mutants generate increased (Ctm)PrP, a transmembrane isoform associated with disease. In other disease situations, a potentially toxic cytosolic form (termed cyPrP) might be produced. However, the mechanisms by which (Ctm)PrP or cyPrP cause selective neuronal dysfunction are unknown. Here, we show that both (Ctm)PrP and cyPrP can interact with and disrupt the function of Mahogunin (Mgrn), a cytosolic ubiquitin ligase whose loss causes spongiform neurodegeneration. Cultured cells and transgenic mice expressing either (Ctm)PrP-producing mutants or cyPrP partially phenocopy Mgrn depletion, displaying aberrant lysosomal morphology and loss of Mgrn in selected brain regions. These effects were rescued by either Mgrn overexpression, competition for PrP-binding sites, or prevention of cytosolic PrP exposure. Thus, transient or partial exposure of PrP to the cytosol leads to inappropriate Mgrn sequestration that contributes to neuronal dysfunction and disease.