Can a Toyota Prius run on E85?

Yes it "can". I personally ran E85 in my Prius with an injector kit (commonly known at E85 conversion kits) for 30k miles with absolutely no issues whatsoever. Essentially all the kit does is hold open the injectors longer to allow more of the less-efficient (Ethanol has a much lower BTU level than Gasoline) fuel into the combustion chamber to keep it from running too lean. The only downside to this is, because the injector kit is put in-line between the computer and the injectors, the kit causes the computer to think it's putting in a lot less than what it actually is - thowing off your MPG reading significantly.

I also ran it without the kit and it again ran fine though without the MPG-readout inacuracy but the Check Engine Light came on indicating the computer is having to inject a significant amount more fuel than normal to keep it from running lean (known as a "lean" code). Of course, being that Ethanol contains less energy, I expierenced a drop of about 10MPG (51 down to 41 in summer).

A lot of sites and the info they list have Ethanol as a terrible fuel-line eating liquid but do your own research. Find out where it is that Ethanol (Ethyl-Alcohol) is any more corrosive than Petrolium-Based products, namely Gasoline. I have yet to see scientific chemical proof that Ethanol will harm any part of a modern (manufactured within the last 15 years) engine.