Cystatin M/E is a high affinity inhibitor of the asparaginyl endopeptidase legumain, and we have previously reported that both proteins are likely to be involved in the regulation of stratum corneum formation in skin. Although cystatin M/E contains a predicted binding site for papain-like cysteine proteases, no high affinity binding for any member of this family has been demonstrated so far. We report that human cathepsin V (CTSV) and human cathepsin L (CTSL) are strongly inhibited by human cystatin M/E. Kinetic studies show that K i values of cystatin M/E for the interaction with CTSV and CTSL are 0.47 and 1.78 nM, respectively. On the basis of the analogous sites in cystatin C, we used site-directed mutagenesis to identify the binding sites of these proteases in cystatin M/E. We found that the W135A mutant was rendered inactive against CTSV and CTSL but retained legumain-inhibiting activity. Conversely, the N64A mutant lost legumain-inhibiting activity but remained active against the papain-like cysteine proteases. We conclude that legumain and papain-like cysteine proteases are inhibited by two distinct non-overlapping sites. Using immunohistochemistry on normal human skin, we found that cystatin M/E co-localizes with CTSV and CTSL. In addition, we show that CTSL is the elusive enzyme that processes and activates epidermal transglutaminase 3. The identification of CTSV and CTSL as novel targets for cystatin M/E, their (co)-expression in the stratum granulosum of human skin, and the activity of CTSL toward transglutaminase 3 strongly imply an important role for these enzymes in the differentiation process of human epidermis.The cellular activity of a protease is the result of many regulatory mechanisms such as the concentration and compartmentalization of substrates, the enzyme itself, and its cognate inhibitors. Cystatins are the natural and specific inhibitors of endogenous mammalian lysosomal cysteine proteases and have shown important regulatory and protective functions in cells and tissues against proteolysis by cysteine proteases of host, bacterial, and viral origin (1-3). The inhibitory activity of cystatins is regulated by a reversible, tight-binding interaction between the protease inhibitor and its target protease (4). Disturbance of the normal balance between cysteine proteases and their inhibitors at a wrong time and location can lead to several pathological conditions such as chronic inflammatory reactions (5), tumor malignancy (6), and faulty differentiation processes in the epidermis and hair follicle (7). Little is known on the specific biological functions of cystatin family members. However, mutations in the genes encoding the cystatin family members cystatin B and C cause neurological phenotypes in humans (8, 9).Cystatin M/E is a 14-kDa secreted protein that shares only 35% homology with other human type 2 cystatins. Nevertheless, it has a similar overall structure including the two characteristic intrachain disulfide bridges (10, 11). Expression of cystatin M/E is found to be restricted to ...