Gamma-secretase, exhibiting characteristics of aspartyl protease, mediates the intramembranous proteolysis of beta-amyloid precursor protein (APP) and Notch, and it is considered to be a prime pharmacological target in the development of therapeutics for Alzheimer's disease (AD). To identify compounds that block gamma-secretase-mediated proteolysis, we used a highly sensitive cell-based reporter gene assay for gamma-secretase in which Gal4/VP16-tagged C99-APP was expressed as the immediate substrate of gamma-secretase, and Gal4/VP16-tagged APP intracellular domain released by the gamma-secretase cleavage then activated the expression of the Gal4-driven luciferase reporter gene. Using this reporter assay, we demonstrated that the newly synthesized (hydroxyethyl)urea peptidomimetics, which contain unnatural amino acid moieties at positions P1' and/or P3', can effectively inhibit gamma-secretase activity and significantly reduce Abeta production. The gamma-secretase-dependent S3 cleavage of Notch was also consistently blocked by these (hydroxyethyl)ureas as evidenced by the decreased generation of the Notch intracellular domain, a prerequisite for the activation of Notch signaling. The inhibition of Notch signaling by active Jia compounds efficiently promotes the neuronal differentiation of neuroblastoma cells, intervening in tumorigenesis and the malignancy of neuroblastomas. Our results suggest that (hydroxyethyl)urea peptidomimetics containing unnatural amino acid substitutions could represent a novel class of gamma-secretase inhibitors with enhanced stability, providing the basis for the further development of effective therapeutics for AD and neuroblastomas.