Melatonin deacetylase, an enzyme activity recently discovered in the Xenopus laevis retina, regulates local melatonin levels. The deacetylase occurs in retina, retinal pigment epithelium, and skin, all sites of melatonin action, and is widely distributed among vertebrates. We have solubilized the enzyme from Xenopus retina and pigment epithelium using nonionic detergents, and have developed a specific enzyme assay. We have characterized the enzyme and now report that the deacetylase is relatively specific for melatonin and is inhibited by the melatonin precursor N-acetylserotonin and the product of the deacetylase, 5-methoxytryptamine. Inhibition of deacetylase activity by eserine (physostigmine) suggests a relationship between deacetylase and cholinesterase activities. However, among a variety of cholinesterase inhibitors tested, only eserine inhibits the deacetylase. Furthermore, eserine is much less potent as an inhibitor of the deacetylase than the cholinesterases, and purified cholinesterases failed to deacetylate melatonin. We also show that melatonin deacetylase and aryl acylamidase (an enzyme related to cholinesterases) activities are differentially extractable from Xenopus ocular tissues, and that they exhibit different pH optima and inhibition profiles. Our results provide an initial characterization of the Xenopus retinal melatonin deacetylase, and indicate that deacetylase activity is distinct from cholinesterase and aryl acylamidase activities.