Kex2 protease from the yeast Saccharomyces cerevisiae is the prototype for a family of eukaryotic proprotein processing proteases. To clarify understanding of the interactions responsible for substrate recognition in this family of enzymes, we have carried out a systematic examination of Kex2 substrate specificity using internally consistent sets of substrates having substitutions at only one or two positions. We examined Kex2 sequence recognition for residues at P3, P2, and P1 using two types of fluorogenic peptide substrates, peptidyl-methylcoumarinamides and internally quenched substrates in which cleavage occurs at an actual peptide bond. Kinetic analysis of the two sets of substrates gave comparable data on specificity at these three positions. For the best substrate sequences, high catalytic constants (kCM/KM) of (2-5) x 10(7) M-1 s-1 were seen for cleavage of both peptidyl-methylcoumarinamides and peptide bonds. While no evidence for positive interactions with the P3 residue emerged, Kex2 was found to discriminate against at least one residue Asp. at this position. Specificity at P2 was shown to rely primarily on recognition of a positive charge, although steric constraints on the P2 side chain were also apparent. Kex2 was demonstrated to be exquisitely selective for Arg at P1. Substitutions with similar charge (Lys, ornithine) or similar hydrogen-bonding capability (citrulline) do not confer efficient catalysis. Comparison of otherwise identical substrates having either Arg or citrulline at P1 showed that the positive charge of the Arg guanidinium group stabilizes the transition state by approximately 6.8 kcal/mol.