Heparan sulfate proteoglycans, attached to cell surfaces or in the extracellular matrix, interact with a multitude of proteins via their heparan sulfate side chains. Degradation of these chains by limited (endoglycosidic) heparanase cleavage is believed to affect a variety of biological processes. Although the occurrence of heparanase activity in mammalian tissues has been recognized for many years, the molecular characteristics and substrate recognition properties of the enzyme(s) have remained elusive. In the present study, the substrate specificity and cleavage site of heparanase from human hepatoma and platelets were investigated. Both enzyme preparations were found to cleave the single beta-D-glucuronidic linkage of a heparin octasaccharide. A capsular polysaccharide from Escherichia coli K5, with the same (-GlcUAbeta1,4-GlcNAcalpha1,4-)n structure as the unmodified backbone of heparan sulfate, resisted heparanase degradation in its native state as well as after chemical N-deacetylation/N-sulfation or partial enzymatic C-5 epimerization of beta-D-GlcUA to alpha-L-IdceA. By contrast, a chemically O-sulfated (but still N-acetylated) K5 derivative was susceptible to heparanase cleavage. O-Sulfate groups, but not N-sulfate or IdceA residues, thus are essential for substrate recognition by the heparanase(s). In particular, selective O-desulfation of the heparin octasaccharide implicated a 2-O-sulfate group on a hexuronic acid residue located two monosaccharide units from the cleavage site, toward the reducing end.