Islet amyloid polypeptide (IAPP; amylin) is a peptide hormone that is cosecreted with insulin from beta-cells. Impaired processing of proIAPP, the IAPP precursor, has been implicated in islet amyloid formation in type 2 diabetes. We previously showed that proIAPP is processed to IAPP by the prohormone convertases PC1/3 and PC2 at its carboxyl (COOH) and amino (NH(2)) termini, respectively. In this study, we investigated the role of carboxypeptidase E (CPE) in the processing of proIAPP using mice lacking active CPE (Cpe(fat)/Cpe(fat)) and NIT-2 cells, a beta-cell line derived from their islets. Western blot analysis demonstrated that an approximately 6-kDa NH(2)-terminally unprocessed form of proIAPP was elevated approximately 86% in islets from Cpe(fat)/Cpe(fat) mice, compared with wild type. This increase was independent of the development of hyperglycemia (8 wk male) or obesity (18 wk female). Impaired proIAPP processing was associated with a decrease in PC2 (but not PC1/3) and both the 21- and 27-kDa forms of the PC2 chaperone protein 7B2, suggesting that PC2-mediated processing of proIAPP at its NH(2) terminus was impaired in the absence of CPE. Formation of COOH-terminally amidated (pro)IAPP was reduced approximately 75% in NIT-2, compared with NIT-1 beta-cells, supporting a direct role for CPE in maturation of IAPP by removal of its COOH-terminal dibasic residues, the step essential for IAPP amidation. We conclude that lack of CPE in islet beta-cells results in a marked decrease in processing of proIAPP at its NH(2) (but not COOH) terminus that is associated with attenuated levels of PC2 and (pro)7B2 and a great reduction in formation of mature amidated IAPP.