The processing of beta-amyloid precursor protein (APP) and generation of beta-amyloid (Abeta) are associated with the pathophysiology of Alzheimer's disease (AD). As the proteases responsible for the process in the human brain have yet to be clarified, we have searched for activities capable of cleaving native brain APP in the human hippocampus. A 40-kDa protein with proteolytic activity that degrades native brain APP in vitro was purified and characterized; molecular analysis identified it as a novel protease belonging to the carboxypeptidase B (CPB) family. PC12 cells overexpressing the cDNA encoding this protease generate a major 12-kDa beta-amyloid-bearing peptide in cytosol, a peptide which has also been detected in a cell-free system using purified brain APP as substrate. Although the protease is homologous to plasma CPB synthesized in liver, it has specific domains such as C-terminal 14 amino acid residues. Western analysis, cDNA-cloning process and Northern analysis suggested a brain-specific expression of this protease. An immunohistochemical study showed that the protease is expressed in various neuronal perikarya, including those of pyramidal neurons of the hippocampus and ependymal-choroid plexus cells, and in a portion of the microglia of normal brains. In brains of patients with sporadic AD, there is decreased neuronal expression of the protease, and clusters of microglia with protease immunoreactivity associated with its extracellular deposition are detected. These findings suggest that brain CPB has a physiological function in APP processing and may have significance in AD pathophysiology.