Eukaryotic proteins with carboxyl-terminal CaaX motifs undergo three post-translational processing reactions-protein prenylation, endoproteolysis, and carboxymethylation. Two genes in yeast encoding CaaX endoproteases, AFC1 and RCE1, have been identified. Rce1p is solely responsible for proteolysis of yeast Ras proteins. When proteolysis is blocked, plasma membrane localization of Ras2p is impaired. The mislocalization of undermodified Ras in the cell suggests that Rce1p is an attractive target for cancer therapeutics. Homologous expression of plasmid-encoded Saccharomyces cerevisiae RCE1 under the control of the GAL1 promoter gave a 370-fold increase in endoprotease activity over an uninduced control. Yeast Rce1p was detected by Western blotting with a yRce1p antibody or with an anti-myc antibody to Rce1p bearing a C-terminal myc-epitope. Membrane preparations were examined for their sensitivity to a variety of protease inhibitors, metal ion chelators, and heavy metals. The enzyme was sensitive to cysteine protease inhibitors, Zn(2+), and Ni(2+). The substrate selectivity of yRce1p was determined for a variety of prenylated CaaX peptides including farnesylated and geranylgeranylated forms of human Ha-Ras, Ki-Ras, N-Ras, and yeast Ras2p, a-mating factor, and Rho2p. Six site-directed mutants of conserved polar and ionic amino acids in yRce1p were prepared. Four of the mutants, H194A, E156A, C251A, and H248A, were inactive. Results from the protease inhibition studies and the site-directed mutagenesis suggest that Rce1p is a cysteine protease.