Tissue transglutaminase (TG2) can modify proteins by transamidation or deamidation of specific glutamine residues. TG2 has a major role in the pathogenesis of celiac disease as it is both the target of disease-specific autoantibodies and generates deamidated gliadin peptides that are recognized by CD4(+), DQ2-restricted T cells from the celiac lesions. Capillary electrophoresis with fluorescence-labeled gliadin peptides was used to separate and quantify deamidated and transamidated products. In a competition assay, the affinity of TG2 to a set of overlapping gamma-gliadin peptides was measured and compared with their recognition by celiac lesion T cells. Peptides differed considerably in their competition efficiency. Those peptides recognized by intestinal T cell lines showed marked competition indicating them as excellent substrates for TG2. The enzyme fine specificity of TG2 was characterized by synthetic peptide libraries and mass spectrometry. Residues in positions -1, +1, +2, and +3 relative to the targeted glutamine residue influenced the enzyme activity, and proline in position +2 had a particularly positive effect. The characterized sequence specificity of TG2 explained the variation between peptides as TG2 substrates indicating that the enzyme is involved in the selection of gluten T cell epitopes. The enzyme is mainly localized extracellularly in the small intestine where primary amines as substrates for the competing transamidation reaction are present. The deamidation could possibly take place in this compartment as an excess of primary amines did not completely inhibit deamidation of gluten peptides at pH 7.3. However, lowering of the pH decreased the reaction rate of the TG2-catalyzed transamidation, whereas the rate of the deamidation reaction was considerably increased. This suggests that the deamidation of gluten peptides by TG2 more likely takes place in slightly acidic environments.