Mutations in ELA2, encoding the human serine protease neutrophil elastase, cause cyclic and severe congenital neutropenia, and recent evidence indicates that the mutations alter the membrane trafficking of neutrophil elastase. These disorders feature impaired bone marrow production of neutrophils along with excess monocytes-terminally differentiated lineages corresponding to the two alternative fates of myeloid progenitor cells. We utilized a modified yeast two-hybrid system and identified a new, widely expressed gene, N2N, whose product is homologous to Notch2, that interacts with neutrophil elastase. N2N is a 36-kDa protein distributed throughout the cell and secreted. Its amino-terminal sequence consists of several EGF repeats identical to those of the extracellular region of Notch2, and its carboxyl terminus contains a unique 24-residue domain required for interaction with neutrophil elastase. Neutrophil elastase cleaves N2N within EGF repeats in vitro and in living cells, but the C-terminal domain retards proteolysis. In vitro, N2N represses transcriptional activities of Notch proteins. Disease-causing mutations of neutrophil elastase disrupt the interaction with N2N, impair proteolysis of N2N and Notch2, and interfere with Notch2 signaling, suggesting defective proteolysis of an inhibitory form of Notch as an explanation for the alternate switching of cell fates characteristic of hereditary neutropenia.