Autosomal dominant neurohypophyseal diabetes insipidus is caused by mutations in the gene encoding the vasopressin precursor protein, prepro-vasopressin-neurophysin II. We analyzed the molecular consequences of a mutation (DeltaG227) recently identified in a Swiss kindred that destroys the translation initiation codon. In COS-7 cells transfected with the mutant cDNA, translation was found to initiate at an alternative ATG, producing a truncated signal sequence that was functional for targeting and translocation but was not cleaved by signal peptidase. The mutant precursor was completely retained within the endoplasmic reticulum. The uncleaved signal did not affect folding of the neurophysin portion of the precursor, as determined by its protease resistance. However, formation of disulfide-linked aggregates indicated that it interfered with the formation of the disulfide bond in vasopressin, most likely by blocking its insertion into the hormone binding site of neurophysin. Preventing disulfide formation in the vasopressin nonapeptide by mutation of cysteine 6 to serine was shown to be sufficient to cause aggregation and retention. These results indicate that the DeltaG227 mutation induces translation of a truncated signal sequence that cannot be cleaved but prevents correct folding and oxidation of vasopressin, thereby causing precursor aggregation and retention in the endoplasmic reticulum.