α4β2 nicotinic acetylcholine receptors (nAChRs) are abundantly expressed throughout the central nervous system and are thought to be the primary target of nicotine, the main addictive substance in cigarette smoking. Understanding the mechanisms by which these receptors are regulated may assist in developing compounds to selectively interfere with nicotine addiction. Here we report previously unrecognized modulatory properties of members of the Ly6 protein family on α4β2 nAChRs. Using a FRET-based Ca(2+) flux assay, we found that the maximum response of α4β2 receptors to agonist was strongly inhibited by Ly6h and Lynx2 but potentiated by Ly6g6e. The mechanisms underlying these opposing effects appear to be fundamentally distinct. Receptor inhibition by Lynx2 was accompanied by suppression of α4β2 expression at the cell surface, even when assays were preceded by chronic exposure of cells to an established chaperone, nicotine. Receptor inhibition by Lynx2 also was resistant to pretreatment with extracellular phospholipase C, which cleaves lipid moieties like those that attach Ly6 proteins to the plasma membrane. In contrast, potentiation of α4β2 activity by Ly6g6e was readily reversible by pretreatment with phospholipase C. Potentiation was also accompanied by slowing of receptor desensitization and an increase in peak currents. Collectively our data support roles for Lynx2 and Ly6g6e in intracellular trafficking and allosteric potentiation of α4β2 nAChRs, respectively.