The presentation of intracellular proteins to the immune system requires their degradation to small peptides that then become associated with major histocompatibility complex (MHC) class I molecules. The generation of these peptides may involve the 20S or 26S proteasome particles, which contain multiple proteolytic activities including distinct sites that preferentially cleave small peptides on the carboxyl side of hydrophobic, basic or acidic residues. Degradation of most cell proteins requires their conjugation to ubiquitin before hydrolysis by the 26S proteasome. This large complex contains the 20S proteasome as its proteolytic core. This ubiquitin-dependent proteolytic pathway is implicated in MHC class I presentation. gamma-Interferon (gamma-IFN), a stimulator of antigen presentation, induces a subclass of proteasomes that contain two MHC-encoded subunits, LMP2 and 7 (refs 5-10). Here we show that gamma-interferon alters the peptidase activities of the 20S and 26S proteasomes without affecting the rates of breakdown of proteins or of ubiquitinated proteins. By enhancing the expression of MHC genes, gamma-IFN increases the proteasomes' capacity to cleave small peptides after hydrophobic and basic residues but reduces cleavage after acidic residues. Moreover, proteasomes of mutants lacking LMP subunits show decreased rates of cleavage after hydrophobic and basic residues. Thus, gamma-IFN and expression of these MHC genes should favour the production by proteasomes of the types of peptides found on MHC class I molecules, which terminate almost exclusively with hydrophobic or basic residues.