Fast dynamic control of skin coloration is rare in the animal kingdom, whether it be pigmentary or structural. Iridescent structural coloration results when nanoscale structures disrupt incident light and selectively reflect specific colours. Unlike animals with fixed iridescent coloration (e.g. butterflies), squid iridophores (i.e. aggregations of iridescent cells in the skin) produce dynamically tuneable structural coloration, as exogenous application of acetylcholine (ACh) changes the colour and brightness output. Previous efforts to stimulate iridophores neurally or to identify the source of endogenous ACh were unsuccessful, leaving researchers to question the activation mechanism. We developed a novel neurophysiological preparation in the squid Doryteuthis pealeii and demonstrated that electrical stimulation of neurons in the skin shifts the spectral peak of the reflected light to shorter wavelengths (greater than 145 nm) and increases the peak reflectance (greater than 245%) of innervated iridophores. We show ACh is released within the iridophore layer and that extensive nerve branching is seen within the iridophore. The dynamic colour shift is significantly faster (17 s) than the peak reflectance increase (32 s), revealing two distinct mechanisms. Responses from a structurally altered preparation indicate that the reflectin protein condensation mechanism explains peak reflectance change, while an undiscovered mechanism causes the fast colour shift.