Dense deposit disease (DDD) is a severe renal disease characterized by accumulation of electron-dense material in the mesangium and glomerular basement membrane. Previously, DDD has been associated with deficiency of factor H (fH), a plasma regulator of the alternative pathway (AP) of complement activation, and studies in animal models have linked pathogenesis to the massive complement factor 3 (C3) activation caused by this deficiency. Here, we identified a unique DDD pedigree that associates disease with a mutation in the C3 gene. Mutant C(3923ΔDG), which lacks 2 amino acids, could not be cleaved to C3b by the AP C3-convertase and was therefore the predominant circulating C3 protein in the patients. However, upon activation to C3b by proteases, or to C3(H₂O) by spontaneous thioester hydrolysis, C(3923ΔDG) generated an active AP C3-convertase that was regulated normally by decay accelerating factor (DAF) but was resistant to decay by fH. Moreover, activated C(3b923ΔDG) and C3(H₂O)(923ΔDG) were resistant to proteolysis by factor I (fI) in the presence of fH, but were efficiently inactivated in the presence of membrane cofactor protein (MCP). These characteristics cause a fluid phase-restricted AP dysregulation in the patients that continuously activated and consumed C3 produced by the normal C3 allele. These findings expose structural requirements in C3 that are critical for recognition of the substrate C3 by the AP C3-convertase and for the regulatory activities of fH, DAF, and MCP, all of which have implications for therapeutic developments.