The formation of beta-amyloid by processing of its precursor protein is a characteristic of Alzheimer's disease. Two proteolytic cleavages produce the amino and carboxyl termini of beta-amyloid, with the latter cleavage site located within the transmembrane domain. Using DNA mutagenesis, we investigated the membrane position and sequence requirements for carboxyl-terminal processing of the beta-amyloid domain. Substitution of negatively charged residues across positions 40-46 of the beta-amyloid domain precluded both beta-amyloid formation and precursor maturation associated with secretory protein transport. In contrast, identical substitutions from positions 48-50 had no adverse effects. Since charged residues typically prevent protein membrane insertion, these data define the membrane boundary to position 46/47, a location allowing greater access to carboxyl-terminal processing of beta-amyloid, possibly without membrane destruction. Deletions within the carboxyl-terminal domain, including 4 residues spanning positions 39-42 of beta-amyloid, resulted in formation of the beta-amyloid peptide. Substituting residues 38-47 or 39-56 of the beta-amyloid domain in the precursor with a transmembrane sequence from another protein yielded a approximately 4-kDa beta-amyloid peptide, reflecting a loose residue specificity for carboxyl-terminal processing to beta-amyloid.