The physiological role of the skeletal muscle-specific calpain 3, p94, is presently unknown, but defects in its gene cause limb girdle muscular dystrophy type 2A. This calcium-dependent cysteine protease resembles the large subunit of m-calpain but with three unique additional sequences: an N-terminal region (NS), and two insertions (IS1 and IS2). The latter two insertions have been linked to the chronic instability of the whole enzyme both in vivo and in vitro. We have shown previously that the core of p94 comprising NS, domains I and II, and IS1 is stable as a recombinant protein in the absence of Ca(2+) and undergoes autolysis in its presence. Here we show that p94I-II cannot hydrolyze an exogenous substrate before autolysis but is increasingly able to do so when autolysis proceeds for several hours. This gain in activity is caused by cleavage of IS1 during autolysis because a deletion mutant lacking the NS region (p94I-II DeltaNS) shows the same activation profile. Similarly, the calpain inhibitors E-64 and leupeptin have almost no inhibitory effect on substrate hydrolysis by p94I-II soon after calcium addition but cause complete inhibition when autolysis progresses for several hours. As autolysis proceeds, there is release of the internal IS1 peptide, but the two portions of the core remain tightly associated. Modeling of p94I-II suggests that IS1 contains an amphipathic alpha-helix flanked by extended loops. The latter are the targets of autolysis and limited digestion by exogenous proteases. The presence and location of the alpha-helix in recombinant IS1 were confirmed by circular dichroism and by the introduction of a L286P helix-disrupting mutation. Within p94I-II, L286P caused premature autoproteolysis of the enzyme. IS1 is an elaboration of a loop in domain II near the active site, and it acts as an internal autoinhibitory propeptide, blocking the active site of p94 from substrates and inhibitors.