β-Amyloid precursor protein (APP) and its cleaved products are strongly implicated in Alzheimer’s disease (AD). Endosomes are highly active APP processing sites, and endosome anomalies associated with upregulated expression of early endosomal regulator, rab5, are the earliest known disease-specific neuronal response in AD. Here, we show that the rab5 effector APPL1 (adaptor protein containing pleckstrin homology domain, phosphotyrosine binding domain and leucine zipper motif) mediates rab5 overactivation in Down syndrome (DS) and AD, which is caused by elevated levels of the β-cleaved carboxy-terminal fragment of APP (βCTF). βCTF recruits APPL1 to rab5 endosomes, where it stabilizes active GTP-rab5, leading to pathologically accelerated endocytosis, endosome swelling and selectively impaired axonal transport of rab5 endosomes. In DS fibroblasts, APPL1 knockdown corrects these endosomal anomalies. βCTF levels are also elevated in AD brain, which is accompanied by abnormally high recruitment of APPL1 to rab5 endosomes as seen in DS fibroblasts. These studies indicate that persistent rab5 overactivation through βCTF–APPL1 interactions constitutes a novel APP-dependent pathogenic pathway in AD.