Zinc metalloproteases of the BMP-1/TOLLOID family (also known as astacins) are extracellular enzymes involved in important developmental processes in metazoans. We report the characterization of the Caenorhabditis elegans gene dpy-31, which encodes the first essential astacin metalloprotease identified in this organism. Loss-of-function mutations in dpy-31 result in cuticle defects, abnormal morphology, and embryonic lethality, indicating that dpy-31 is required for formation of the collagenous exoskeleton. DPY-31 is widely expressed in the hypodermal cells, which are responsible for cuticle secretion. We have investigated the dpy-31 function through reversion analysis. While complete reversion can be obtained only by intragenic suppressors, reversion of the Dpy-31 lethal phenotype also can be caused by dominant extragenic suppressors. Nine extragenic suppressors carry mutations in the uniquely essential collagen gene sqt-3, which we show is the same gene as rol-4. Most mutations exhibit the unusual property of exclusively dominant suppression and all affect the sequence of the SQT-3 collagen C terminus. This suggests that DPY-31 is responsible for C-terminal proteolytic processing of collagen trimers and is therefore a structural and functional homolog of vertebrate BMP-1. The results also demonstrate the critical importance of the collagen C-terminal sequence, which is highly conserved among all 49 members of the SQT-3 subfamily.