Impaired degradation of amyloid beta (Abeta) peptides could lead to Abeta accumulation, an early trigger of Alzheimer's disease (AD). How Abeta-degrading enzymes are regulated remains largely unknown. Cystatin C (CysC, CST3) is an endogenous inhibitor of cysteine proteases, including cathepsin B (CatB), a recently discovered Abeta-degrading enzyme. A CST3 polymorphism is associated with an increased risk of late-onset sporadic AD. Here, we identified CysC as the key inhibitor of CatB-induced Abeta degradation in vivo. Genetic ablation of CST3 in hAPP-J20 mice significantly lowered soluble Abeta levels, the relative abundance of Abeta1-42, and plaque load. CysC removal also attenuated Abeta-associated cognitive deficits and behavioral abnormalities and restored synaptic plasticity in the hippocampus. Importantly, the beneficial effects of CysC reduction were abolished on a CatB null background, providing direct evidence that CysC regulates soluble Abeta and Abeta-associated neuronal deficits through inhibiting CatB-induced Abeta degradation.