Progressive cerebral amyloid beta-protein (A beta) deposition is believed to play a central role in the pathogenesis of Alzheimer's disease (AD). Elevated levels of A beta(42) peptide formation have been linked to early-onset familial AD-causing gene mutations in the amyloid beta-protein precursor (A beta PP) and the presenilins. Sequential cleavage of A beta PP by the beta- and gamma-secretases generates the N- and C-termini of the A beta peptide, making both the beta- and gamma-secretase enzymes potential therapeutic targets for AD. The identity of the A beta PP gamma-secretase and the mechanism by which the C-termini of A beta are formed remain uncertain, although it has been suggested that the presenilins themselves are novel intramembrane-cleaving gamma-secretases of the aspartyl protease class [Wolfe, M. S., Xia, W., Ostaszewski, B. L., Diehl, T. S., Kimberly, W. T., and Selkoe, D. J. (1999) Nature 398, 513-517]. In this study we report the identification of L-685,458 as a structurally novel inhibitor of A beta PP gamma-secretase activity, with a similar potency for inhibition of A beta(42) and A beta(40) peptides. This compound contains an hydroxyethylene dipeptide isostere which suggests that it could function as a transition state analogue mimic of an aspartyl protease. The preferred stereochemistry of the hydroxyethylene dipeptide isostere was found to be the opposite to that required for inhibition of the HIV-1 aspartyl protease, a factor which may contribute to the observed specificity of this compound. Specific and potent inhibitors of A beta PP gamma-secretase activity such as L-685,458 will enable important advances toward the identification and elucidation of the mechanism of action of this enigmatic protease.