The xbp-1 mRNA encodes the XBP-1 transcription factor, a critical part of the unfolded protein response. Here we report that an RNA fragment produced from xbp-1 mRNA cleavage is a biologically active non-coding RNA (ncRNA) essential for axon regeneration in Caenorhabditis elegans. We show that the xbp-1 ncRNA acts independently of the protein-coding function of the xbp-1 transcript as part of a dual output xbp-1 mRNA stress response axis. Structural analysis indicates that the function of the xbp-1 ncRNA depends on a single RNA stem; this stem forms only in the cleaved xbp-1 ncRNA fragment. Disruption of this stem abolishes the non-coding, but not the coding, function of the endogenous xbp-1 transcript. Thus, cleavage of the xbp-1 mRNA bifurcates it into a coding and a non-coding pathway; modulation of the two pathways may allow neurons to fine-tune their response to injury and other stresses.