The carboxy-terminal ends of the 40- and 42-amino acids amyloid beta-protein (Abeta) may be generated by the action of at least two different proteases termed gamma(40)- and gamma(42)-secretase, respectively. To examine the cleavage specificity of the two proteases, we treated amyloid precursor protein (APP)-transfected cell cultures with several dipeptidyl aldehydes including N-benzyloxycarbonyl-Leu-leucinal (Z-LL-CHO) and the newly synthesized N-benzyloxycarbonyl-Val-leucinal (Z-VL-CHO). All dipeptidyl aldehydes tested inhibited production of both Abeta1-40 and Abeta1-42. Changes in the P1 and P2 residues of these aldehydes, however, indicated that the amino acids occupying these positions are important for the efficient inhibition of gamma-secretases. Peptidyl aldehydes inhibit both cysteine and serine proteases, suggesting that the two gamma-secretases belong to one of these mechanistic classes. To differentiate between the two classes of proteases, we treated our cultures with the specific cysteine protease inhibitor E-64d. This agent inhibited production of secreted Abeta1-40, with a concomitant accumulation of its cellular precursor indicating that gamma(40)-secretase is a cysteine protease. In contrast, this treatment increased production of secreted Abeta1-42. No inhibition of Abeta production was observed with the potent calpain inhibitor I (acetyl-Leu-Leu-norleucinal), suggesting that calpain is not involved. Together, these results indicate that gamma(40)-secretase is a cysteine protease distinct from calpain, whereas gamma(42)-secretase may be a serine protease. In addition, the two secretases may compete for the same substrate. Dipeptidyl aldehyde treatment of cultures transfected with APP carrying the Swedish mutation resulted in the accumulation of the beta-secretase C-terminal APP fragment and a decrease of the alpha-secretase C-terminal APP fragment, indicating that this mutation shifts APP cleavage from the alpha-secretase site to the beta-secretase site.