Regulated intramembrane proteolysis is a method for transducing signals between cellular compartments. When protein folding is compromised in the periplasm of E. coli, the C termini of outer-membrane proteins (OMPs) bind to the PDZ domains of the trimeric DegS protease and activate cleavage of RseA, a transmembrane transcriptional regulator. We show here that DegS is an allosteric enzyme. OMP binding shifts the equilibrium from a nonfunctional state, in which the active sites are unreactive, to the functional proteolytic conformation. Crystallographic, biochemical, and mutagenic experiments show that the unliganded PDZ domains are inhibitory and suggest that OMP binding per se is sufficient to stabilize the relaxed conformation and activate DegS. OMP-induced activation and RseA binding are both positively cooperative, allowing switch-like behavior of the OMP-DegS-RseA system. Residues involved in the DegS allosteric switch are conserved in the DegP/HtrA and HtrA2/Omi families, suggesting that many PDZ proteases use a common mechanism of allosteric activation.