Heparanase is an endo-␤-D-glucuronidase that degrades heparan sulfate in the extracellular matrix and cell surfaces. Human proheparanase is produced as a latent 65-kDa polypeptide undergoing processing at two potential proteolytic cleavage sites, located at Glu 109 -Ser 110 (site 1) and Gln 157 -Lys 158 (site 2). Cleavage of proheparanase yields 8-and 50-kDa subunits that heterodimerize to form the active enzyme. The fate of the linker segment (Ser 110 -Gln 157 ) residing between the two subunits, the mode of processing, and the protease(s) engaged in proheparanase processing are currently unknown. We applied multiple site-directed mutagenesis and deletions to study the nature of the potential cleavage sites and amino acids essential for processing of proheparanase in transfected human choriocarcinoma cells devoid of endogenous heparanase but possessing the enzymatic machinery for proper processing and activation of the proenzyme. Although mutagenesis at site 1 and its flanking sequences failed to identify critical residues for proteolytic cleavage, processing at site 2 required a bulky hydrophobic amino acid at position 156 (i.e. P2 of the cleavage site). Substitution of Tyr 156 by Ala or Glu, but not Val, resulted in cleavage at an upstream site in the linker segment, yielding an improperly processed inactive enzyme. Processing of the latent 65-kDa proheparanase in transfected Jar cells was inhibited by a cell-permeable inhibitor of cathepsin L. Moreover, recombinant 65-kDa proheparanase was processed and activated by cathepsin L in a cell-free system. Altogether, these results suggest that proheparanase processing at site 2 is brought about by cathepsin L-like proteases. The involvement of other members of the cathepsin family with specificity to bulky hydrophobic residues cannot be excluded. Our results and a threedimensional model of the enzyme are expected to accelerate the design of inhibitory molecules capable of suppressing heparanase-mediated enhancement of tumor angiogenesis and metastasis.