Background: Imbalance of iron homeostasis has been reported in sporadic Creutzfeldt-Jakob-disease (sCJD) affected human and scrapie infected animal brains, but the contribution of this phenotype to disease associated neurotoxicity is unclear. Methodology/Principal Findings: Using cell models of familial prion disorders, we demonstrate that exposure of cells expressing normal prion protein (PrPC) or mutant PrP forms to a source of redox-iron induces aggregation of PrPC and specific mutant PrP forms. Initially this response is cytoprotective, but becomes increasingly toxic with time due to accumulation of PrP-ferritin aggregates. Mutant PrP forms that do not aggregate are not cytoprotective, and cells show signs of acute toxicity. Intracellular PrP-ferritin aggregates induce the expression of LC3-II, indicating stimulation of autophagy in these cells. Similar observations are noted in sCJD and scrapie infected hamster brains, lending credence to these results. Furthermore, phagocytosis of PrP-ferritin aggregates by astrocytes is cytoprotective, while culture in astrocyte conditioned medium (CM) shows no measurable effect. Exposure to H2O2, on the other hand, does not cause aggregation of PrP, and cells show acute toxicity that is alleviated by CM. Conclusions/Significance: These observations suggest that aggregation of PrP in response to redox-iron is cytoprotective. However, subsequent co-aggregation of PrP with ferritin induces intracellular toxicity unless the aggregates are degraded by autophagosomes or phagocytosed by adjacent scavenger cells. H2O2, on the other hand, does not cause aggregation of PrP, and induces toxicity through extra-cellular free radicals. Together with previous observations demonstrating imbalance of iron homeostasis in prion disease affected brains, these observations provide insight into the mechanism of neurotoxicity by redox-iron, and the role of PrP in this process. © 2010 Das et al.