Peptidase N (PepN) is a broad specific metallo-peptidase and the sole member of the M1 class encoded by Escherichia coli. Comparative analysis of residues present in the S1 subsite of E. coli PepN with other family members revealed that Tyr-381 is conserved whereas Glu-121, Gln-119 and Tyr-376 are partially conserved. The functional importance of these amino acids was investigated by protein engineering studies. The change in Glu-121 to Gln and Tyr-381 to Phe led to catalytically inactive PepN. At the same time, the change in Gln-119 to His (Q119H) and Tyr-376 to Phe (Y376F) led to alterations in substrate specificity. Kinetic studies revealed that purified PepN variants, Q119H and Y376F, cleaved some substrates (e.g. Arg) similar to wild type PepN. However, these variants displayed lower efficacy with other substrates (e.g. Tyr, AAF and Suc-AAF). Q119H or Y376F, cleave a natural peptide (insulin B chain) and a loosely folded protein (casein) with greatly reduced efficacy. The double mutant, i.e. harboring both Q119H and Y376F, displays greatly reduced catalytic activity with respect to all substrates studied. The in vivo significance was addressed by expressing these variants in ΔpepN during nutritional downshift and high temperature (NDHT) stress. Compared to wild type PepN, the Y376F and Q119H variants display lower intracellular amounts of free N-terminal amino acids and reduction in growth during NDHT stress. Finally, structural modeling, using the crystal structure of E. coli PepN bound to substrates, Arg or Tyr, shed insights into the roles of Q119H and Y376F in determining substrate preferences.