Proteins containing C-terminal "CAAX" sequence motifs undergo three sequential post-translational processing steps: modification of the cysteine with either a 15-carbon farnesyl or 20-carbon geranylgeranyl isoprenyl lipid, proteolysis of the C-terminal -AAX tripeptide, and methylation of the carboxyl group of the now C-terminal prenylcysteine. A putative prenyl protein protease in yeast, designated Rce1p, was recently identified. In this study, a portion of a putative human homologue of RCE1 (hRCE1) was identified in a human expressed sequence tag data base, and the corresponding cDNA was cloned. Expression of hRCE1 was detected in all tissues examined. Both yeast and human RCE1 proteins were produced in Sf9 insect cells by infection with a recombinant baculovirus; membrane preparations derived from the infected Sf9 cells exhibited a high level of prenyl protease activity. Recombinant hRCE1 so produced recognized both farnesylated and geranylgeranylated proteins as substrates, including farnesyl-Ki-Ras, farnesyl-N-Ras, farnesyl-Ha-Ras, and the farnesylated heterotrimeric G protein Ggamma1 subunit, as well as geranylgeranyl-Ki-Ras and geranylgeranyl-Rap1b. The protease activity of hRCE1 activity was specific for prenylated proteins, because unprenylated peptides did not compete for enzyme activity. hRCE1 activity was also exquisitely sensitive to a prenyl peptide analogue that had been previously described as a potent inhibitor of the prenyl protease activity in mammalian tissues. These data indicate that both the yeast and the human RCE1 gene products are bona fide prenyl protein proteases and suggest that they play a major role in the processing of CAAX-type prenylated proteins.