The major brain nicotinic acetylcholine receptor is assembled from two subunits termed alpha 4 and n alpha 1. When expressed in Xenopus oocytes, these subunits reconstitute a functional acetylcholine receptor that is inhibited by progesterone levels similar to those found in serum. In this report, we show that the steroid interacts with a site located on the extracellular part of the protein, thus confirming that inhibition by progesterone is not due to a nonspecific perturbation of the membrane bilayer or to the activation of second messengers. Because inhibition by progesterone does not require the presence of agonist, is voltage-independent, and does not alter receptor desensitization, we conclude that the steroid is not an open channel blocker. In addition, we show that progesterone is not a competitive inhibitor but may interact with the acetylcholine binding site and that its effect is independent of the ionic permeability of the receptor.