The Saccharomyces cerevisiae PEP3 gene was cloned from a wild-type genomic library by complementation of the carboxypeptidase Y deficiency in a pep3-12 strain. Subclone complementation results localized the PEP3 gene to a 3.8-kb DNA fragment. The DNA sequence of the fragment was determined; a 2,754-bp open reading frame predicts that the PEP3 gene product is a hydrophilic, 107-kDa protein that has no significant similarity to any known protein. The PEP3 predicted protein has a zinc finger (CX2CX13CX2C) near its C terminus that has spacing and slight sequence similarity to the adenovirus E1a zinc finger. A radiolabeled PEP3 DNA probe hybridized to an RNA transcript of 3.1 kb in extracts of log-phase and diauxic lag-phase cells. Cells bearing pep3 deletion/disruption alleles were viable, had decreased levels of protease A, protease B, and carboxypeptidase Y antigens, had decreased repressible alkaline phosphatase activity, and contained very few normal vacuolelike organelles by fluorescence microscopy and electron microscopy but had an abundance of extremely small vesicles that stained with carboxyfluorescein diacetate, were severely inhibited for growth at 37 degrees C, and were incapable of sporulating (as homozygotes). Fractionation of cells expressing a bifunctional PEP3::SUC2 fusion protein indicated that the PEP3 gene product is present at low abundance in both log-phase and stationary cells and is a vacuolar peripheral membrane protein. Sequence identity established that PEP3 and VPS18 (J. S. Robinson, T. R. Graham, and S. D. Emr, Mol. Cell. Biol. 11:5813-5824, 1991) are the same gene.