Alzheimer's disease is characterized by the deposits of the 4-kDa amyloid beta peptide (A beta). The A beta protein precursor (APP) is cleaved by beta-secretase to generate a C-terminal fragment, CTF beta, which in turn is cleaved by gamma-secretase to generate A beta. Alternative cleavage of the APP by alpha-secretase at A beta 16/17 generates the C-terminal fragment, CTFalpha. In addition to A beta, endoproteolytic cleavage of CTF alpha and CTF beta by gamma-secretase should yield a C-terminal fragment of 57-59 residues (CTF gamma). However, CTF gamma has not yet been reported in either brain or cell lysates, presumably due to its instability in vivo. We detected the in vitro generation of A beta as well as an approximately 6-kDa fragment from guinea pig brain membranes. We have provided biochemical and pharmacological evidence that this 6-kDa fragment is the elusive CTF gamma, and we describe an in vitro assay for gamma-secretase activity. The fragment migrates with a synthetic peptide corresponding to the 57-residue CTF gamma fragment. Three compounds previously identified as gamma-secretase inhibitors, pepstatin-A, MG132, and a substrate-based difluoroketone (t-butoxycarbonyl-Val-Ile-(S)-4-amino-3-oxo-2, 2-difluoropentanoyl-Val-Ile-OMe), reduced the yield of CTF gamma, providing additional evidence that the fragment arises from gamma-secretase cleavage. Consistent with reports that presenilins are the elusive gamma-secretases, subcellular fractionation studies showed that presenilin-1, CTF alpha, and CTF beta are enriched in the CTF gamma-generating fractions. The in vitro gamma-secretase assay described here will be useful for the detailed characterization of the enzyme and to screen for gamma-secretase inhibitors.