Ionotropic glutamate receptor (GluR) expression and function is regulated through multiple pre- and post-translational mechanisms. We find that limited proteolytic cleavage of GluR3 at two distinct sites generates stable GluR3 short forms that are glycosylated and found in association with other full-length GluRs in the mouse brain and cultured primary neurons. A combination of mutagenesis and transfection into HEK293 cells revealed cleavage by a gamma-secretase-like activity within the membrane-localized re-entry loop at or near the leucine-glycine pair (amino acids 585-586, GluR3sbeta) and a second site within a proline-rich PEST-like sequence in the first cytoplasmic loop (Asp570-Pro571, GluR3salpha). Generation of the prominent GluR3salpha form was effectively abolished in the mutant, GluR3D570A, but inhibitors of lysosomes, the proteasome, caspases, or calpains had no effect. The possible impact of cleavage on receptor function was suggested when the co-expression of the GluR3P571Stop mutant (creating GluR3salpha) co-assembled with other GluR subunits and decreased receptor function in Xenopus oocytes. In transiently transfected HEK293 cells, co-expression of GluR3salpha alters the relative association between GluR1 and GluR3 during assembly, and the presence of the novel C-terminal proline-rich domain of GluR3salpha imparts lateral membrane mobility to GluR complexes. These results suggest that limited proteolysis is another post-translational mechanism through which functional diversity and specialization between closely related GluR subunits is accomplished.