Mutations in the PHEX gene (phosphate-regulating gene with homologies to endopeptidases on the X chromosome) are responsible for X-linked hypophosphataemia, and studies in the Hyp mouse model of the human disease implicate the gene product in the regulation of renal phosphate (P(i)) reabsorption and bone mineralization. Although the mechanism for PHEX action is unknown, structural homologies with members of the M13 family of endopeptidases suggest a function for PHEX protein in the activation or degradation of peptide factors involved in the control of renal P(i) transport and matrix mineralization. To determine whether PHEX has endopeptidase activity, we generated a recombinant soluble, secreted form of human PHEX (secPHEX) and tested the activity of the purified protein with several peptide substrates, including a variety of bone-related peptides. We found that parathyroid-hormone-related peptide(107-139) is a substrate for secPHEX and that the enzyme cleaves at three positions within the peptide, all located at the N-terminus of aspartate residues. Furthermore, we show that osteocalcin, PP(i) and P(i), all of which are abundant in bone, are inhibitors of secPHEX activity. Inhibition of secPHEX activity by osteocalcin was abolished in the presence of Ca(2+). We suggest that PHEX activity and mineralization may be controlled in vivo by PP(i)/P(i) and Ca(2+) and, in the latter case, the regulation requires the participation of osteocalcin.