The proteasome usually completely degrades its target proteins, but it can also degrade a handful of proteins in a limited and site-specific manner. The molecular mechanism for such limited degradation is unknown. The repressor forms of Gli2 and Gli3 transcription factors are generated from their full-length proteins through limited proteasome-mediated protein degradation. In this study, we have taken advantage of the fact that Gli3 is efficiently processed, whereas Gli2 is not, and identified a region of approximately 200 residues in their C termini that determine differential processing of the two proteins. This region, named processing determinant domain, functions as a signal for protein processing in the context of not only Gli2 and Gli3 protein sequences but also a heterologous hybrid protein, which would otherwise be completely degraded by the proteasome. Thus, the processing determinant domain constitutes a novel domain that functions independently. Our findings explain, at the molecular level, why Gli2 and Gli3 are differentially processed and, more importantly, may help understand a probably general mechanism by which the proteasome degrades some of its target proteins partially rather than completely.