The K7L gene product of the smallpox virus is a protease implicated in the maturation of viral proteins. K7L belongs to protease Clan CE, which includes distantly related cysteine proteases from eukaryotes, pathogenic bacteria, and viruses. Here, we describe its recombinant high level expression, biochemical mechanism, substrate preference, and regulation. Earlier studies inferred that the orthologous I7L vaccinia protease cleaves at an AG-X motif in six viral proteins. Our data for K7L suggest that the AG-X motif is necessary but not sufficient for optimal cleavage activity. Thus, K7L requires peptides extended into the P7 and P8 positions for efficient substrate cleavage. Catalytic activity of K7L is substantially enhanced by homodimerization, by the substrate protein P25K as well as by glycerol. RNA and DNA also enhance cleavage of the P25K protein but not of synthetic peptides, suggesting that nucleic acids augment the interaction of K7L with its protein substrate. Library-based peptide preference analyses enabled us to design an activity-based probe that covalently and selectively labels K7L in lysates of transfected and infected cells. Our study thus provides proof-of-concept for the design of inhibitors and probes that may contribute both to a better understanding of the role of K7L in the virus life cycle and the design of novel anti-virals.