We have shown previously that cleavage of a number of precursors by the mitochondrial processing peptidase (MPP) requires an intermediate octapeptide (FXXSXXXX) between the MPP cleavage site and the mature protein amino terminus. We show now that these octapeptides, present at the amino termini of the intermediates, direct recognition of these substrates by the mitochondrial intermediate peptidase (MIP), leading to formation of mature proteins. Synthetic peptides, corresponding to the intermediate octapeptides of human ornithine transcarbamylase (OTC) and of Neurospora cytochrome c reductase Fe/S subunit (Fe/S), inhibit the processing activity of purified rat liver MIP in vitro, without affecting MPP activity; this indicates that the octapeptides can be recognized by MIP independent of the presence of the corresponding mature proteins and interact with a site that is crucial for MIP activity. MIP activity is not inhibited by a peptide lacking the amino-terminal hydrophobic residue, while substitution of such a residue by a polar amino acid causes a 10-fold reduction in the efficiency of MIP inhibition. To analyze the requirements for removal of the octapeptide from the intermediate proteins by MIP, artificial intermediates were synthesized and subjected to in vitro processing by purified MIP. The octapeptide can be cleaved by MIP only when the amino-terminal hydrophobic residue is also the amino terminus of the intermediate. Further, when the OTC octapeptide is joined to the mature amino terminus of another twice-cleaved precursor (pFe/S; rat malate dehydrogenase, pMDH), the chimeric intermediate is cleaved by MIP to the corresponding mature-sized protein. When the OTC octapeptide is joined to the mature amino terminus of a once-cleaved precursor (yeast F1-beta-ATPase, pF1-beta), however, this intermediate is not cleaved by MIP; rather, it is processed by MPP to mature-sized F1-beta. Therefore, amino-terminal octapeptides can be cleaved by MIP only within the structural context of twice-cleaved precursors.