Although BACE1 (beta-site amyloid precursor protein–cleaving enzyme 1) is essential for the generation of amyloid-b peptide in Alzheimer's disease, its physiological function is unclear. We found that very high levels of BACE1 were expressed at time points when peripheral nerves become myelinated. Deficiency of BACE1 resulted in the accumulation of unprocessed neuregulin 1 (NRG1), an axonally expressed factor required for glial cell development and myelination. BACE1^–/– mice displayed hypomyelination of peripheral nerves and aberrant axonal segregation of small-diameter afferent fibers, very similar to that seen in mice with mutations in type III NRG1 or Schwann cell–specific ErbB2 knockouts. Thus, BACE1 is required for myelination and correct bundling of axons by Schwann cells, probably through processing of type III NRG1.