The inactivation of elongation factor 2 (EF-2) by diphtheria toxin requires the presence of a post-translationally modified histidine residue in EF-2. This residue, diphthamide, has the structure 2-[3-carboxyamido-3-(trimethylammonio)propyl]histidine. The present work was undertaken to study the pathway of diphthamide biosynthesis using diphtheria toxin-resistant yeast mutants (Chen. J.-Y., Bodley, J. W., and Livingston, D. M. (1985) Mol. Cell. Biol. 5, 3357-3360) which are defective in diphthamide formation. We demonstrate here that one of these mutants (dph5) contains a toxin-resistant form of EF-2 which can be converted in vitro to a toxin-sensitive form through the action of an enzyme present in other yeast strains. Both this toxin-resistant EF-2 and its modifying enzyme have been partially purified and evidence is presented that the modifying enzyme is a specific S-adenosylmethionine:EF-2 methyltransferase. In vitro complementation to diphtheria toxin sensitivity required S-adenosylmethionine, and when partially purified components were incubated with [methyl-3H]S-adenosylmethionine, label was incorporated specifically into EF-2. Hydrolysis of labeled EF-2 yielded diphthine (the unamidated form of diphthamide) and a single chromatographically separable labeling intermediate. We conclude that the S-adenosylmethionine:EF-2 methyltransferase adds at least the last two of the three methyl groups present in diphthine and that this modification is sufficient to create diphtheria toxin sensitivity. Evidence is also presented for the existence of an ATP-dependent amidating enzyme which catalyzes the final step in the biosynthesis of diphthamide in EF-2.