Accumulation of the amyloid-beta protein (Abeta) in the cerebral cortex is an early and invariant event in the pathogenesis of Alzheimer's disease. The final step in the generation of Abeta from the beta-amyloid precursor protein is an apparently intramembranous proteolysis by the elusive gamma-secretase(s). The most common cause of familial Alzheimer's disease is mutation of the genes encoding presenilins 1 and 2, which alters gamma-secretase activity to increase the production of the highly amyloidogenic Abeta42 isoform. Moreover, deletion of presenilin-1 in mice greatly reduces gamma-secretase activity, indicating that presenilin-1 mediates most of this proteolytic event. Here we report that mutation of either of two conserved transmembrane (TM) aspartate residues in presenilin-1, Asp 257 (in TM6) and Asp 385 (in TM7), substantially reduces Abeta production and increases the amounts of the carboxy-terminal fragments of beta-amyloid precursor protein that are the substrates of gamma-secretase. We observed these effects in three different cell lines as well as in cell-free microsomes. Either of the Asp --> Ala mutations also prevented the normal endoproteolysis of presenilin-1 in the TM6 --> TM7 cytoplasmic loop. In a functional presenilin-1 variant (carrying a deletion in exon 9) that is associated with familial Alzheimer's disease and which does not require this cleavage, the Asp 385 --> Ala mutation still inhibited gamma-secretase activity. Our results indicate that the two transmembrane aspartate residues are critical for both presenilin-1 endoproteolysis and gamma-secretase activity, and suggest that presenilin 1 is either a unique diaspartyl cofactor for gamma-secretase or is itself gamma-secretase, an autoactivated intramembranous aspartyl protease.