γ-secretase is an aspartyl protease that cleaves multiple substrates within their transmembrane domains. γ- secretase processes the amyloid precursor protein (APP) to generate β-amyloid (Aβ) peptides associated with Alzheimer's disease. Here, we show that APP possesses a substrate inhibitory domain (ASID) that negatively modulates γ-secretase activity for Aβ production by binding to an allosteric site within the γ-secretase complex. Alteration of this ASID by deletion or mutation, as is seen with the Flemish mutation (A21G), reduces its inhibitory potency and promotes Aβ production. Notably, peptides derived from ASID show selective inhibition of γ-secretase activity for Aβ production over Notch1 processing. Therefore, this mode of regulation represents an unprecedented mechanism for modulating γ-secretase, providing insight into the molecular basis of Alzheimer's disease pathogenesis and a potential strategy for the development of therapeutics.